AMD Industries (NSE:AMDIND) has had a great run on the share market with its stock up by a significant 30% over the last month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to AMD Industries’ ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for AMD Industries is:
6.1% = ₹97m ÷ ₹1.6b (Based on the trailing twelve months to June 2023).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
AMD Industries’ Earnings Growth And 6.1% ROE
It is hard to argue that AMD Industries’ ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company’s ROE is quite dismal. In spite of this, AMD Industries was able to grow its net income considerably, at a rate of 48% in the last five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that AMD Industries’ growth is quite high when compared to the industry average growth of 16% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about AMD Industries”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is AMD Industries Efficiently Re-investing Its Profits?
AMD Industries has a really low three-year median payout ratio of 18%, meaning that it has the remaining 82% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Besides, AMD Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we feel that AMD Industries certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 5 risks we have identified for AMD Industries by visiting our risks dashboard for free on our platform here.
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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.