Holmarc Opto-Mechatronics Limited's (NSE:HOLMARC) Stock Is Going Strong: Is the Market Following Fundamentals?

Simply Wall St · 10/16 00:32

Holmarc Opto-Mechatronics (NSE:HOLMARC) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Holmarc Opto-Mechatronics' ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Holmarc Opto-Mechatronics

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 Holmarc Opto-Mechatronics is:

14% = ₹34m ÷ ₹238m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.14 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Holmarc Opto-Mechatronics' Earnings Growth And 14% ROE

At first glance, Holmarc Opto-Mechatronics' ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. Especially when you consider Holmarc Opto-Mechatronics' exceptional 33% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. 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.

Next, on comparing Holmarc Opto-Mechatronics' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% over the last few years.

past-earnings-growth
NSEI:HOLMARC Past Earnings Growth October 16th 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Holmarc Opto-Mechatronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Holmarc Opto-Mechatronics Making Efficient Use Of Its Profits?

Holmarc Opto-Mechatronics' ' three-year median payout ratio is on the lower side at 10% implying that it is retaining a higher percentage (90%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Conclusion

Overall, we are quite pleased with Holmarc Opto-Mechatronics' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 4 risks we have identified for Holmarc Opto-Mechatronics.