Texmaco Rail & Engineering Limited (NSE:TEXRAIL) is doing well but fundamentals look mixed: is there a clear direction for the stock?
Texmaco Rail & Engineering (NSE:TEXRAIL) stock is up 40% in the past month. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In this article, we decided to focus on the ROE of Texmaco Rail & Engineering.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Discover our latest analysis for Texmaco Rail & Engineering
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Texmaco Rail & Engineering is:
2.8% = ₹330 million ÷ ₹12 billion (based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. This means that for every ₹1 of equity, the company generated ₹0.03 of profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
Profit growth and ROE of 2.8% from Texmaco Rail & Engineering
As you can see, Texmaco Rail & Engineering’s ROE seems quite low. Not only that, even compared to the industry average of 13%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 16% decline in net income over five years observed by Texmaco Rail & Engineering was possibly the result of lower ROE. We believe there could be other factors at play here as well. Such as – low income retention or poor capital allocation.
So, in a next step, we benchmarked Texmaco Rail & Engineering’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 13% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Texmaco Rail & Engineering is trading on a high P/E or a low P/E, relative to its industry.
Does Texmaco Rail & Engineering use its profits efficiently?
When we piece together Texmaco Rail & Engineering’s low three-year median payout ratio of 10% (where it retains 90% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company keeps most of its profits and therefore should see some growth. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Texmaco Rail & Engineering has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. the company.
Overall, we feel that the performance displayed by Texmaco Rail & Engineering can be subject to many interpretations. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. You can see the 5 risks we have identified for Texmaco Rail & Engineering by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.