Fine Organic Industries (NSE:FINEORG) has had a rough month with its share price down 6.3%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Fine Organic Industries’ ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Fine Organic Industries
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Fine Organic Industries is:
26% = ₹4.5b ÷ ₹17b (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder’s investments, the company generates a profit of ₹0.26.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Fine Organic Industries’ Earnings Growth And 26% ROE
To start with, Fine Organic Industries’ ROE looks acceptable. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. Probably as a result of this, Fine Organic Industries was able to see an impressive net income growth of 35% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Fine Organic Industries’ growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Fine Organic Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Fine Organic Industries Using Its Retained Earnings Effectively?
Fine Organic Industries has a really low three-year median payout ratio of 9.1%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, Fine Organic Industries has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 17% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 19%, over the same period.
Summary
On the whole, we feel that Fine Organic Industries’ performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
Valuation is complex, but we’re helping make it simple.
Find out whether Fine Organic Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
