Is Weakness In Hind Rectifiers Limited (NSE:HIRECT) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Simply Wall St · 04/15 00:37

It is hard to get excited after looking at Hind Rectifiers' (NSE:HIRECT) recent performance, when its stock has declined 19% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Hind Rectifiers' ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hind Rectifiers is:

23% = ₹322m ÷ ₹1.4b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.23.

Check out our latest analysis for Hind Rectifiers

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Hind Rectifiers' Earnings Growth And 23% ROE

To begin with, Hind Rectifiers seems to have a respectable ROE. Especially when compared to the industry average of 15% the company's ROE looks pretty impressive. This probably laid the ground for Hind Rectifiers' moderate 5.0% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Hind Rectifiers' reported growth was lower than the industry growth of 32% over the last few years, which is not something we like to see.

past-earnings-growth
NSEI:HIRECT Past Earnings Growth April 15th 2025

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Hind Rectifiers fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hind Rectifiers Making Efficient Use Of Its Profits?

Hind Rectifiers' three-year median payout ratio to shareholders is 8.6% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Hind Rectifiers is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we are quite pleased with Hind Rectifiers' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for Hind Rectifiers by visiting our risks dashboard for free on our platform here.