Can Mixed Fundamentals Have A Negative Impact on Steel Authority of India Limited (NSE:SAIL) Current Share Price Momentum?
Steel Authority of India's (NSE:SAIL) stock is up by a considerable 12% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Steel Authority of India's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
Return on equity 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 Steel Authority of India is:
4.4% = ₹26b ÷ ₹583b (Based on the trailing twelve months to September 2025).
The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.04 in profit.
See our latest analysis for Steel Authority of India
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Steel Authority of India's Earnings Growth And 4.4% ROE
It is quite clear that Steel Authority of India's ROE is rather low. Even compared to the average industry ROE of 9.7%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 24% seen by Steel Authority of India was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
However, when we compared Steel Authority of India's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 24% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Steel Authority of India is trading on a high P/E or a low P/E, relative to its industry.
Is Steel Authority of India Efficiently Re-investing Its Profits?
In spite of a normal three-year median payout ratio of 28% (that is, a retention ratio of 72%), the fact that Steel Authority of India's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Steel Authority of India has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 23%. However, Steel Authority of India's ROE is predicted to rise to 7.0% despite there being no anticipated change in its payout ratio.
Summary
Overall, we have mixed feelings about Steel Authority of India. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.