Is Lumax Auto Technologies Limited's (NSE:LUMAXTECH) Recent Stock Performance Tethered To Its Strong Fundamentals?

Lumax Auto Technologies (NSE:LUMAXTECH) has had a great run on the share market with its stock up by a significant 101% over the last three months. 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. In this article, we decided to focus on Lumax Auto Technologies' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Lumax Auto Technologies is:

18% = ₹2.3b ÷ ₹13b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.18.

See our latest analysis for Lumax Auto Technologies

What Has ROE Got To Do With 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 Lumax Auto Technologies' Earnings Growth And 18% ROE

To begin with, Lumax Auto Technologies seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Probably as a result of this, Lumax Auto Technologies was able to see an impressive net income growth of 31% over the last five years. We reckon that there could also be other factors at play here. 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.

We then performed a comparison between Lumax Auto Technologies' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 27% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Lumax Auto Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lumax Auto Technologies Efficiently Re-investing Its Profits?

The three-year median payout ratio for Lumax Auto Technologies is 31%, which is moderately low. The company is retaining the remaining 69%. By the looks of it, the dividend is well covered and Lumax Auto Technologies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Lumax Auto Technologies 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 32%. Still, forecasts suggest that Lumax Auto Technologies' future ROE will rise to 24% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Lumax Auto Technologies' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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.