ZF Commercial Vehicle Control Systems India Limited's (NSE:ZFCVINDIA) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

ZF Commercial Vehicle Control Systems India's (NSE:ZFCVINDIA) stock up by 8.8% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to ZF Commercial Vehicle Control Systems India's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 ZF Commercial Vehicle Control Systems India is:

14% = ₹4.6b ÷ ₹32b (Based on the trailing twelve months to March 2025).

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 ₹0.14 in profit.

View our latest analysis for ZF Commercial Vehicle Control Systems India

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

ZF Commercial Vehicle Control Systems India's Earnings Growth And 14% ROE

At first glance, ZF Commercial Vehicle Control Systems India's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. Especially when you consider ZF Commercial Vehicle Control Systems India's exceptional 33% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared ZF Commercial Vehicle Control Systems India's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 27%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ZF Commercial Vehicle Control Systems India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ZF Commercial Vehicle Control Systems India Making Efficient Use Of Its Profits?

ZF Commercial Vehicle Control Systems India has a really low three-year median payout ratio of 7.9%, meaning that it has the remaining 92% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, ZF Commercial Vehicle Control Systems India has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 5.2% over the next three years. The fact that the company's ROE is expected to rise to 18% over the same period is explained by the drop in the payout ratio.

Summary

In total, we are pretty happy with ZF Commercial Vehicle Control Systems 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 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.