Most readers will already know that shares of Network People Services Technologies (NSE: NPST) have risen a significant 23% over the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on the ROE of Network People Services Technologies.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Network People Services Technologies
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Network People Services Technologies is:
6.4% = ₹14 million ÷ ₹213 million (based on the last twelve months to September 2021).
“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 ₹0.06.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge 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.
Side-by-side comparison of Network People Services Technologies’ 6.4% profit and ROE growth
It is clear that the ROE of Network People Services Technologies is rather weak. Even compared to the industry average ROE of 13%, the company’s ROE is pretty dismal. As a result, Network People Services Technologies’ earnings stability over the past five years is no surprise given its low ROE.
As a next step, we benchmarked Network People Services Technologies’ net income growth against the industry and found that the industry saw an average growth of 14% over the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about the valuation of Network People Services Technologies, check out this indicator of its price/earnings ratio, relative to its sector.
Does Network People Services Technologies use its benefits effectively?
Network People Services Technologies pays no dividends, which means it keeps all of its profits. This leads us to wonder why the company retains so much of its profits and still generates almost no growth? It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.
Overall, we have mixed feelings about Network People Services Technologies. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. So far, we’ve only scratched the surface of the company’s past performance by looking at the company’s fundamentals. So it might be worth checking that out. free detailed graph Network People Services Technologies past revenue, as well as revenue and cash flow to get a deeper insight into the company’s performance.
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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.