Most readers already know that shares of Linc (NSE:LINC) are up a significant 28% over the past month. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. Specifically, we decided to study Linc’s ROE in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Linc
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Linc is:
5.3% = ₹73 million ÷ ₹1.4 billion (based on the last twelve months to September 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.05.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Linc’s earnings growth and ROE of 5.3%
It’s pretty clear that Linc’s ROE is pretty low. Even compared to the industry average ROE of 7.5%, the company’s ROE is pretty dismal. Given the circumstances, the significant decline in net income of 24% experienced by Linc over the past five years is not surprising. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low income retention or poor capital allocation.
That being said, we benchmarked Linc’s performance against the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 7.7% in during the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Linc’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Linc use its profits effectively?
Although the company has paid a portion of its dividend in the past, it currently does not pay any dividend. This implies that potentially all of its profits are reinvested in the business.
All in all, we’re a bit ambivalent about Linc’s performance. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. Our risk dashboard would have the 4 risks we identified for Linc.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.