Stock Futures – Stock Futures – Action Construction Equipment Limited’s (NSE:ACE) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects? | Fintech Zoom

Most readers would already be aware that Action Construction Equipment’s (NSE:ACE) stock increased significantly by 81% over the past 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. Particularly, we will be paying attention to Action Construction Equipment’s 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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for Action Construction Equipment

How To 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 Action Construction Equipment is:

8.1% = ₹366m ÷ ₹4.5b (Based on the trailing twelve months to September 2020).

The ‘return’ is the profit over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.08 in profit.

What Has ROE Got To Do With Earnings 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 “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.

A Side By Side comparison of Action Construction Equipment’s Earnings Growth And 8.1% ROE

As you can see, Action Construction Equipment’s ROE looks pretty weak. A comparison with the industry shows that the company’s ROE is pretty similar to the average industry ROE of 8.2%. However, the modest 18% net income growth seen by Action Construction Equipment over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. Such as – high earnings retention or an efficient management in place.

We then compared Action Construction Equipment’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 7.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Action Construction Equipment’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Action Construction Equipment Using Its Retained Earnings Effectively?

Action Construction Equipment has a low three-year median payout ratio of 11%, meaning that the company retains the remaining 89% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Action Construction Equipment has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Action Construction Equipment has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Action Construction Equipment by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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