Is WABCO India Limited (NSE: WABCOINDIA) share price struggling due to mixed financial results?
It’s hard to get excited after looking at the recent performance of WABCO India (NSE: WABCOINDIA), when its stock fell 3.3% in the past week. We did, however, decide to study the company’s financial statements to determine if they had anything to do with falling prices. Stock prices are generally determined by a company’s financial performance over the long term, which is why we have decided to pay more attention to the financial performance of the company. Specifically, we decided to study the ROE of WABCO India in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest analysis for WABCO India
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, WABCO India’s ROE is:
7.8% = ₹ 1.6b ÷ ₹ 20b (Based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every 1 of social capital it has, the company has made 0.08 of profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of WABCO India’s 7.8% profit growth and ROE
It is clear that the ROE of WABCO India is rather low. Not only that, even compared to the industry average of 11%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 14% drop in five-year net profit seen by WABCO India may have been the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has a very high payout ratio or faces competitive pressures.
In the next step, we compared the performance of WABCO India with that of the industry and found that the performance of WABCO India is depressing even when compared to the industry, which decreased its profits by 7.9% in the past. during the same period, which is slower than the business. .
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading towards clear blue waters or swampy waters ahead. Is WABCO India properly rated against other companies? These 3 evaluation measures could help you decide.
Is WABCO India Using Profits Efficiently?
WABCO India’s low three-year median payout rate of 9.0% (or a retention rate of 91%) over the past three years should mean the company is keeping most of its profits to fuel its growth, but the company’s profits actually declined. This should generally not be the case when a business keeps most of its profits. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
Additionally, WABCO India has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we have mixed feelings about WABCO India. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. You can see the 1 risk we have identified for WABCO India by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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