Ice Make Refrigeration Limited (NSE: ICEMAKE) Stock is strong but fundamentals look uncertain: what lies ahead?

Ice Make Refrigeration (NSE: ICEMAKE) inventory has risen 24% over the past week. However, we wonder if the inconsistent financial data of the company would negatively impact the current momentum in stock prices. In this article, we have decided to focus on the ROE of Ice Make Refrigeration.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for ice making refrigeration

How is the ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Ice Make Refrigeration is:

6.6% = ₹ 37m ₹ 552m (Based on the last twelve months up to September 2021).

The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every 1 of registered capital it has, the company has made ₹ 0.07 in profit.

What does ROE have to do with profit growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

Growth in profits of Ice Make Refrigeration and 6.6% of ROE

As you can see, the ROE of Ice Make Refrigeration seems quite low. Even compared to the industry average of 12%, the ROE figure is quite disappointing. Therefore, it might not be wrong to say that the 11% drop in net income over five years seen by Ice Make Refrigeration may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.

That being said, we compared the performance of Ice Make Refrigeration with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of. 13% over the same period.

NSEI: ICEMAKE Past Profit Growth December 17, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is Ice Make Refrigeration valued enough compared to other companies? These 3 evaluation measures could help you decide.

Does Ice Make Refrigeration use its profits effectively?

Despite a normal three-year median payout rate of 43% (where it keeps 57% of its profits), Ice Make Refrigeration has seen its profits decline as we saw above. So there could be other explanations in this regard. For example, the business of the company can deteriorate.

Additionally, Ice Make Refrigeration has been paying dividends for the past four years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer constant dividends even though earnings have declined.

Summary

Overall, we have mixed feelings about Ice Make Refrigeration. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. You can see the 4 risks we have identified for ice making refrigeration by visiting our risk dashboard for free on our platform here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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