Are Robust Financials Driving The Recent Rally In Eicher Motors Limited's (NSE:EICHERMOT) Stock?

Eicher Motors (NSE:EICHERMOT) has had a great run on the share market with its stock up by a significant 5.2% over the last week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Eicher Motors' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Eicher Motors

How Is ROE Calculated?

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 Eicher Motors is:

24% = ₹38b ÷ ₹159b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.24 in profit.

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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Eicher Motors' Earnings Growth And 24% ROE

To start with, Eicher Motors' ROE looks acceptable. On comparing with the average industry ROE of 19% the company's ROE looks pretty remarkable. This probably laid the ground for Eicher Motors' moderate 13% net income growth seen over the past five years.

As a next step, we compared Eicher Motors' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Eicher Motors''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Eicher Motors Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Eicher Motors is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Eicher Motors has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Summary

On the whole, we feel that Eicher Motors' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.