Is the recent stock market performance of 20 Microns Limited (NSE: 20MICRONS) influenced by its fundamentals in any way?
Most readers already know that the 20 Micron stock (NSE: 20MICRONS) has increased significantly by 74% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will pay particular attention to the ROE of 20 Microns today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest analysis for 20 Microns
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 ROE for 20 microns is:
9.2% = ₹ 182m ₹ 2.0b (Based on the last twelve months up to December 2020).
“Return” refers to a company’s profits over the past year. This means that for every 1 of equity, the company generated ₹ 0.09 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 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. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
20 micron profit growth and 9.2% ROE
At first glance, the ROE of 20 Microns is not much to say. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 13%. However, the moderate 8.2% net income growth seen by 20 microns over the past five years is certainly positive. Thus, there could be other aspects that positively influence the growth of the company’s profits. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout rate.
We then compared the 20 Micron net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 14% over the same period. which is a bit disturbing.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. 20 Microns is it just valued over other companies? These 3 evaluation measures could help you decide.
20 Microns Efficiently Using Its Profits?
20 Mic has a low three-year median payout rate of 8.8%, which means the company keeps the remaining 91% of its profits. This suggests that management is reinvesting most of the profits to grow the business.
In addition, 20 Microns is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years.
Overall, we believe 20 Microns has positive attributes. That is, decent profit growth supported by a high reinvestment rate. However, we believe that this profit growth could have been higher if the company had improved thanks to the low ROE rate. Especially considering the way the company reinvests a huge chunk of its profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. You can see the 4 risks we have identified for 20 Microns by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. 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 documents. Simply Wall St has no position in the mentioned stocks.
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