Will the weakness in Hikal Limited (NSE: HIKAL) stocks prove temporary given strong fundamentals?
Hikal (NSE: HIKAL) had a tough three months with its stock price down 19%. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. In this article, we have decided to focus on Hikal’s ROE.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Hikal
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Hikal is:
18% = â¹ 1.9b Ã· â¹ 10b (Based on the last twelve months up to September 2021).
The âreturnâ is the amount earned after tax over the past twelve months. This means that for every 1 in equity, the company generated 0.18 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Hikal profit growth and 18% ROE
At first glance, Hikal appears to have a decent ROE. Compared to the industry’s average ROE of 15%, the company’s ROE looks quite remarkable. This certainly adds context to Hikal’s decent 18% net income growth seen over the past five years.
We then performed a comparison between Hikal’s net income growth with the industry, which found that the company’s growth is similar to the industry’s average growth of 22% over the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about Hikal’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Hikal Efficiently Reinvesting Its Profits?
In Hikal’s case, its respectable earnings growth can likely be explained by its low three-year median payout rate of 15% (or an 85% retention rate), suggesting that the company is investing most of its profits to develop its activity.
Additionally, Hikal has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders.
Overall, we are quite happy with the performance of Hikal. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.