Is the recent performance of Escorts Kubota Limited (NSE:ESCORTS) shares influenced by its fundamentals in any way?

Escorts Kubota (NSE:ESCORTS) has had a strong run in the stock market with a significant 33% rise in its shares over the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we will pay close attention to the ROE of Kubota Escorts today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Our analysis indicates that ESCORTS is potentially overpriced!

How to calculate return on equity?

The ROE formula is:

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

So, based on the above formula, the ROE for Kubota Escorts is:

9.2% = ₹7.0 billion ÷ ₹76 billion (based on the last twelve months to June 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.09.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Supports Kubota’s profit growth and 9.2% ROE

When you first look at it, Kubota Escorts ROE does not look so attractive. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 13%. However, we are pleasantly surprised to see that Escorts Kubota has grown its net profit at a significant rate of 21% over the past five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with the industry net income growth, we found that the growth of Escorts Kubota is quite high compared to the industry average growth of 15% over the same period, which is great to see.

NSEI: ESCORTS Past Earnings Growth October 11, 2022

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. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you may want to check whether Escorts Kubota is trading on a high P/E or a low P/E, relative to its industry.

Does Escorts Kubota effectively use its retained earnings?

Escorts Kubota’s three-year median payout ratio is less than 5.4%, which means it retains a higher percentage (95%) of its earnings. So it looks like management is massively reinvesting earnings to grow their business, which is reflected in their earnings growth.

Additionally, Escorts Kubota is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 10.0% over the next three years. However, Escorts Kubota’s future ROE is expected to increase to 12% despite the company’s expected increase in payout ratio. We infer that there could be other factors that could be driving the company’s anticipated ROE growth.

Conclusion

All in all, it seems that Escorts Kubota has positive aspects for its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. Looking at current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.

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