LGB Forge Limited’s (NSE: LGBFORGE) stock has seen strong momentum: Does it require a deeper examination of its economic outlook?

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Most readers would already be aware that LGB Forges (NSE: LGBFORGE) stock has risen significantly by 66% over the last three months. As most would know, this is basically what usually drives market price movements in the long run, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study LGB Forge’s ROE in this article.

Return on equity or ROE is an important factor to consider by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on capital provided by the company’s shareholders.

See our latest analysis for LGB Forge

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

So based on the above formula, ROE for LGB Forge is:

3.0% = 9.5 million ÷ 315 mio. (Based on the subsequent twelve months to December 2020).

The ‘return’ is the annual profit. Another way of thinking about it is that for every equity value of ₹ 1, the company was able to earn $ 0.03 in profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.

A side-by-side comparison of LGB Forge’s earnings growth and 3.0% ROE

As you can see, the LGB Forges ROE looks pretty weak. Even compared to the industry average of 8.9%, the ROE figure is quite disappointing. However, we are pleasantly surprised to see that LGB Forge grew its net income at a significant rate of 32% over the last five years. Therefore, there may be other reasons behind this growth. Such as – high earnings retention or effective management in place.

As a next step, we compared LGB Forge’s net income growth with the industry, and we were pleased that the growth experienced by the company is higher than the average industry growth of 7.4%.

NSEI: LGBFORGE Past earnings growth February 15, 2021

Earnings growth is a huge factor in the valuation of stocks. What investors need to determine next is whether the expected earnings growth or the lack of it is already built into the stock price. This will help them determine if the future of the stock looks promising or ominous. If you’re wondering about LGB Forge’s valuation, check it out this measure of the price-to-earnings ratio, compared to its industry.

Is LGB Forge Effectively Exploiting Its Profits?

Summary

Overall, we feel that LGB Forge definitely has some positive factors to consider. Despite the low returns, the fact that the company reinvests a very high portion of the profits in its business undoubtedly contributed to its high earnings growth. Even if we do not completely lay off the company, what we would do is try to determine how risky the company is to make a more informed decision about the company. Our risk dashboard would have the 3 risks we have identified for LGB Forge.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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