Craftsman Automation Limited (NSE: CRAFTSMAN) stock on an uptrend: Could fundamentals be driving momentum?

Craftsman Automation (NSE: CRAFTSMAN) has had a strong run in the stock market with a significant increase in its stock of 41% in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In this article, we have decided to focus on the ROE of Craftsman Automation.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Craftsman Automation

How do you calculate return on equity?

the formula for ROE is:

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

So, based on the above formula, the ROE for Craftsman Automation is:

10% = 974m 9.7b (based on the last twelve months up to March 2021).

The “return” is the annual profit. One way to conceptualize this is that for every 1 of registered capital it has, the company has made ₹ 0.10 in profit.

Why is ROE important for 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Craftsman Automation’s 10% profit growth and ROE

When you first look at it, Craftsman Automation’s ROE doesn’t look so appealing. However, given that the company’s ROE is similar to the industry average ROE of 10%, we can think about it. In contrast, Craftsman Automation has seen moderate growth in net income of 9.2% over the past five years. Given the slightly low ROE, it is likely that other aspects are behind this growth. For example, the business has a low payout ratio or is managed efficiently.

Then, comparing Craftsman Automation’s net income growth with the industry, we found that the reported growth of the company is similar to the industry average growth rate of 8.6% over the same period. .

NSEI: CRAFTSMAN Past Profit Growth July 6, 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. If you’re wondering about Craftsman Automation’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Craftsman Automation Efficiently Using Its Retained Profits?

Craftsman Automation’s three-year median payout ratio to shareholders is 4.2% (implying it keeps 96% of its revenue), which is lower, so it looks like management is heavily reinvesting profits into develop its activity.

After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 5.0% over the next three years. Either way, Craftsman Automation’s future ROE is expected to increase to 18% despite the expected increase in payout ratio. There could probably be other factors that could be driving future ROE growth.

summary

Overall, we think Craftsman Automation has some positive attributes. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to be redirected to our business analyst forecasts page.

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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 material. Simply Wall St has no position in any of the stocks mentioned.
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About Geraldine Higgins

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