Stock Analysis

MRF Limited's (NSE:MRF) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

NSEI:MRF
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Most readers would already be aware that MRF's (NSE:MRF) stock increased significantly by 28% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to MRF's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 MRF is:

10% = ₹19b ÷ ₹185b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.10 in profit.

Check out our latest analysis for MRF

What Is The Relationship Between ROE And 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.

MRF's Earnings Growth And 10% ROE

On the face of it, MRF's ROE is not much to talk about. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. Having said that, MRF has shown a modest net income growth of 11% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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 MRF's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.

past-earnings-growth
NSEI:MRF Past Earnings Growth July 9th 2025

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 MRF is trading on a high P/E or a low P/E, relative to its industry.

Is MRF Using Its Retained Earnings Effectively?

In MRF's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 5.1% (or a retention ratio of 95%), which suggests that the company is investing most of its profits to grow its business.

Moreover, MRF 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 5.0% of its profits over the next three years. Still, forecasts suggest that MRF's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that MRF has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.