Century Plyboards (India) (NSE:CENTURYPLY) has had a great run on the share market with its stock up by a significant 30% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Century Plyboards (India)'s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Century Plyboards (India)
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Century Plyboards (India) is:
12% = ₹2.7b ÷ ₹22b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.12 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
On the face of it, Century Plyboards (India)'s ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 9.8%, is definitely interesting. Particularly, the substantial 21% net income growth seen by Century Plyboards (India) over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
As a next step, we compared Century Plyboards (India)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 28% in the same period.
Earnings growth is a huge factor in stock valuation. 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. 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 Century Plyboards (India) is trading on a high P/E or a low P/E, relative to its industry.
Century Plyboards (India)'s ' three-year median payout ratio is on the lower side at 6.8% implying that it is retaining a higher percentage (93%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Besides, Century Plyboards (India) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 5.9%. Still, forecasts suggest that Century Plyboards (India)'s future ROE will rise to 19% even though the the company's payout ratio is not expected to change by much.
On the whole, we do feel that Century Plyboards (India) has some positive attributes. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.