Declining Stock and Decent Financials: Is The Market Wrong About Graphite India Limited (NSE:GRAPHITE)?

Graphite India (NSE:GRAPHITE) has had a rough week with its share price down 4.7%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Graphite India's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Graphite India is:

7.3% = ₹4.2b ÷ ₹58b (Based on the trailing twelve months to December 2024).

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 ₹0.07 in profit.

See our latest analysis for Graphite India

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. 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 Graphite India's Earnings Growth And 7.3% ROE

As you can see, Graphite India's ROE looks pretty weak. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Graphite India saw an exceptional 37% net income growth over the past five years. Therefore, there could be other reasons 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.

Next, on comparing Graphite India's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 32% over the last few years.

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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for GRAPHITE? You can find out in our latest intrinsic value infographic research report.

Is Graphite India Making Efficient Use Of Its Profits?

Graphite India's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Graphite India is reinvesting its earnings efficiently.

Besides, Graphite 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 41% of its profits over the next three years. Still, forecasts suggest that Graphite India's future ROE will rise to 16% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Graphite India has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.