Maruti Suzuki India Limited's (NSE:MARUTI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Maruti Suzuki India's (NSE:MARUTI) stock increased significantly by 11% 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. Specifically, we decided to study Maruti Suzuki India's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Maruti Suzuki India is:

16% = ₹145b ÷ ₹891b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.16 in profit.

See our latest analysis for Maruti Suzuki India

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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Maruti Suzuki India's Earnings Growth And 16% ROE

To begin with, Maruti Suzuki India seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 24%. That being the case, the significant five-year 29% net income growth reported by Maruti Suzuki India comes as a pleasant surprise. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.

We then performed a comparison between Maruti Suzuki India's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 31% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. 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 Maruti Suzuki India is trading on a high P/E or a low P/E, relative to its industry.

Is Maruti Suzuki India Making Efficient Use Of Its Profits?

The three-year median payout ratio for Maruti Suzuki India is 32%, which is moderately low. The company is retaining the remaining 68%. So it seems that Maruti Suzuki India is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Maruti Suzuki India 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. As a result, Maruti Suzuki India's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Conclusion

Overall, we are quite pleased with Maruti Suzuki India's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.