The stock of Oberoi Realty (NSE: OBEROIRLTY) has increased by 10% in the past month. Given that the market rewards strong financials over the long term, we wonder if this is the case in this case. In particular, we will pay special attention to the ROE of Oberoi Realty 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 review for Oberoi Realty
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Oberoi Realty is:
7.9% = 7.4 billion ₹ ÷ 94 billion ₹ (based on the last twelve months to March 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every ₹ 1 worth of equity, the company generated ₹ 0.08 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. 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.
A side-by-side comparison of Oberoi Realty’s profit growth and ROE of 7.9%
It is clear that the ROE of Oberoi Realty is rather low. However, compared to the industry average of 3.6%, we think there is definitely more to the business. In particular, the modest 12% net income growth observed by Oberoi Realty over the past five years is positive. Keep in mind that the business has a low ROE. It’s just that the industry’s ROE is lower. So there could be other reasons why profits are increasing. 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 net income growth of Oberoi Realty with the industry and we are happy to see that the growth figure of the company is higher than that of the industry which has a growth rate of 7, 8% over the same period.
Profit growth is an important factor in the valuation of stocks. 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 ahead of them. What is OBEROIRLTY worth today? The intrinsic value infographic in our free research report helps visualize whether OBEROIRLTY is currently poorly valued by the market.
Does Oberoi Realty use its profits effectively?
Although the company has paid part of its dividend in the past, it does not currently pay a dividend. We deduce that the company reinvests all its profits to develop its activity.
All in all, we are quite satisfied with the performance of Oberoi Realty. In particular, we like the fact that the company is reinvesting heavily in its activities at a moderate rate of return. Unsurprisingly, this led to impressive profit growth. That said, the latest forecast from industry analysts shows that the company’s profits are expected to pick up. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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