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

Eicher Motors' (NSE:EICHERMOT) stock is up by a considerable 28% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You 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 Eicher Motors is:

23% = ₹48b ÷ ₹213b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.23 in profit.

Check out our latest analysis for Eicher Motors

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Eicher Motors' Earnings Growth And 23% ROE

To begin with, Eicher Motors seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 22%. Consequently, this likely laid the ground for the impressive net income growth of 30% seen over the past five years by Eicher Motors. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Eicher Motors' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 32% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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?

Eicher Motors has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. So it seems that Eicher Motors is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Eicher Motors has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. As a result, Eicher Motors' ROE is not expected to change by much either, which we inferred from the analyst estimate of 22% for future ROE.

Conclusion

In total, we are pretty happy with Eicher Motors' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.