Prataap Snacks Limited (NSE:DIAMONDYD) stock is on the rise but financials look inconsistent: will the uptrend continue?
Return on equity or ROE is a useful tool to evaluate how effectively a company is generating returns on the investment it has received from its shareholders. In short, ROE shows the profit each dollar generates in relation to shareholders’ investments.
Check out our latest analysis for Prataap Snacks
How is return on equity calculated?
Return on equity can be calculated using the formula:
Return on equity = net profit (from continuing operations) ÷ shareholders’ equity
Therefore, based on the above formula, the ROE for Prataap Snacks is:
8.1% = INR 574 million ÷ INR 7.1 billion (Based on the trailing twelve months to September 2023).
“Return” is the income the company earned over the past year. Another way to think about it is that for every Rs 1 worth of stock, the company was able to earn Rs 0.08 in dividends.
Why is return on equity important for earnings growth?
We have already established that ROE serves as an effective profit-generating measure of a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea of the growth potential of the company. In general, other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that don’t share these traits.
Side-by-side comparison of Prataap Snacks’ earnings growth and 8.1% return on equity
It’s pretty clear that Prataap Snacks’ ROE is rather low. Even compared to the average industry ROE of 11%, the company’s ROE is quite dismal. For this reason, Prataap Snacks’ five-year net income decline of 21% is not surprising given the low ROE. However, there may also be other factors that lead to lower profits. For example, the company has allocated capital poorly, or the company has a payout ratio that is too high.
However, we compared Prataap Snacks’ performance to the industry and were concerned to find that while the company cut its dividend, the industry increased its dividend by an average of 17% in the same five-year 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 a company’s expected earnings growth (or decline). Doing so will help them determine whether the stock’s future looks promising or ominous. Has the market priced in DIAMONDYD’s outlook? You can find out in our latest Intrinsic Value research report.
Is Pratap Snacks making effective use of its profits?
Prataap Snacks’ low three-year payout ratio of 8.3% (or a retention ratio of 92%) over the last three years must mean that the company is retaining most of its earnings to fuel its growth but that the company’s earnings have actually shrunk. A low yield should mean that the company is retaining most of its profits and, therefore, should see some growth. It seems that there may be some other reasons to explain the deficiency in this regard. For example, business may be in decline.
Furthermore, Prataap Snacks has been paying a dividend for five years, which is a long time, suggesting that management must have realized that shareholders would prefer a steady dividend despite shrinking earnings.
On the whole, we feel that the performance delivered by Prataap Snacks can be open to many interpretations. While the company has a high rate of reinvestment, a low ROE means that all of this reinvestment reaps no benefit for its investors and, furthermore, has a negative impact on earnings growth. That being the case, the latest industry analyst forecasts show that analysts expect to see a significant improvement in the company’s earnings growth rate. Are these analysts’ forecasts based on general industry expectations or on company fundamentals? Click here to go to the company’s analyst forecasts page.
Evaluation is complex, but we help simplify it.
Find out if Prataap Snacks is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account the company’s most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.