Has Bajaj Auto Limited's (NSE:BAJAJ-AUTO) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Most readers would already be aware that Bajaj Auto's (NSE:BAJAJ-AUTO) stock increased significantly by 10% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Bajaj Auto's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Bajaj Auto is:
21% = ₹73b ÷ ₹352b (Based on the trailing twelve months to March 2025).
The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.21 in profit.
View our latest analysis for Bajaj Auto
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Bajaj Auto's Earnings Growth And 21% ROE
At first glance, Bajaj Auto seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 21%. Consequently, this likely laid the ground for the decent growth of 10% seen over the past five years by Bajaj Auto.
We then compared Bajaj Auto's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 32% in the same 5-year period, which is a bit concerning.
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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Bajaj Auto is trading on a high P/E or a low P/E, relative to its industry.
Is Bajaj Auto Making Efficient Use Of Its Profits?
Bajaj Auto has a significant three-year median payout ratio of 66%, meaning that it is left with only 34% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Moreover, Bajaj Auto is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 75% of its profits over the next three years. Regardless, the future ROE for Bajaj Auto is predicted to rise to 29% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we do feel that Bajaj Auto has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
About NSEI:BAJAJ-AUTO
Bajaj Auto
Engages in the development, manufacture, and distribution of automobiles in India and internationally.
Adequate balance sheet average dividend payer.
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