Thomas Scott (India) Limited’s (NSE:THOMASCOTT) Stock Has Seen Strong Momentum: Does That Call For


Thomas Scott (India) (NSE:THOMASCOTT) has had a great run on the share market with its stock up by a significant 13% over the last week. As most would know, fundamentals are what usually guide market price movements over the long-term, 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. Particularly, we will be paying attention to Thomas Scott (India)’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Thomas Scott (India)

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Thomas Scott (India) is:

8.7% = ₹8.9m ÷ ₹103m (Based on the trailing twelve months to June 2022).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.09 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Thomas Scott (India)’s Earnings Growth And 8.7% ROE

As you can see, Thomas Scott (India)’s ROE looks pretty weak. Even compared to the average industry ROE of 12%, the company’s ROE is quite dismal. However, we we’re pleasantly surprised to see that Thomas Scott (India) grew its net income at a significant rate of 24% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Thomas Scott (India)’s growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

past-earnings-growth
NSEI:THOMASCOTT Past Earnings Growth November 5th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Thomas Scott (India) is trading on a high P/E or a low P/E, relative to its industry.

Is Thomas Scott (India) Making Efficient Use Of Its Profits?

Given that Thomas Scott (India) doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we do feel that Thomas Scott (India) has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Thomas Scott (India) visit our risks dashboard for free.

Valuation is complex, but we’re helping make it simple.

Find out whether Thomas Scott (India) is potentially over 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 by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.



Read More: Thomas Scott (India) Limited’s (NSE:THOMASCOTT) Stock Has Seen Strong Momentum: Does That Call For

2022-11-04 19:32:59

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