Is ITI Limited (NSE: ITI) share price struggling due to mixed financial results?

ITI (NSE: ITI) had a tough week with its stock price down 7.3%. We decided, however, 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. In this article, we have decided to focus on ITI’s ROE.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest analysis for ITI

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ITI’s ROE is:

1.0% = ₹ 241m ÷ ₹ 23b (Based on the last twelve months up to September 2021).

The “return” is the profit of the last twelve months. This means that for every 1 of equity, the company generated ₹ 0.01 in 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 how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything 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 than companies that do not have the same characteristics.

ITI profit growth and 1.0% ROE

It’s pretty clear that ITI’s ROE is pretty low. Even compared to the industry average of 8.9%, the ROE figure is quite disappointing. Given the circumstances, the significant drop in net income of 49% observed by ITI over the past five years is not surprising. We believe there could be other factors at play here as well. Such as – low profit retention or misallocation of capital.

However, when we compared ITI’s growth with that of the industry, we found that although the company’s profits declined, the industry saw profit growth of 6.9%. during the same period. It is quite worrying.

NSEI: ITI Past profit growth on December 21, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A 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 outlook. So, you might want to check if ITI is trading high P / E or low P / E, relative to its industry.

Is ITI Efficiently Reinvesting Its Profits?

ITI does not pay any dividends, which means that all of its profits are potentially reinvested in the company, which does not explain why the profits of the company have fallen if it keeps all of its profits. So there could be other explanations in this regard. For example, the business of the company can deteriorate.

Conclusion

Overall, we believe that the performance displayed by ITI can be open to many interpretations. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. You can see the 4 risks we have identified for ITI by visiting our risk dashboard for free on our platform here.

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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.


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