Has Allied Digital Services Limited's (NSE:ADSL) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Simply Wall St · 10/15 00:16

Allied Digital Services (NSE:ADSL) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Allied Digital Services' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Allied Digital Services

How Do You Calculate Return On Equity?

ROE 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 Allied Digital Services is:

7.7% = ₹477m ÷ ₹6.2b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.08 in profit.

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. 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.

Allied Digital Services' Earnings Growth And 7.7% ROE

It is hard to argue that Allied Digital Services' ROE is much good in and of itself. Not just that, even compared to the industry average of 14%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Allied Digital Services saw an exceptional 23% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Allied Digital Services' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 21% in the same period.

past-earnings-growth
NSEI:ADSL Past Earnings Growth October 15th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One 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 prospects. So, you may want to check if Allied Digital Services is trading on a high P/E or a low P/E, relative to its industry.

Is Allied Digital Services Efficiently Re-investing Its Profits?

Allied Digital Services has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Allied Digital Services is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Allied Digital Services has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Allied Digital Services has some positive attributes. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.