Should Weakness in Graphite India Limited's (NSE:GRAPHITE) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 8.9% over the past month, it is easy to disregard Graphite India (NSE:GRAPHITE). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Graphite India's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To 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:

4.0% = ₹2.4b ÷ ₹59b (Based on the trailing twelve months to September 2025).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.04.

Check out our latest analysis for Graphite India

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Graphite India's Earnings Growth And 4.0% ROE

As you can see, Graphite India's ROE looks pretty weak. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. Despite this, surprisingly, Graphite India saw an exceptional 29% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Graphite India's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 33% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Graphite India's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Graphite India Efficiently Re-investing Its Profits?

The three-year median payout ratio for Graphite India is 47%, which is moderately low. The company is retaining the remaining 53%. By the looks of it, the dividend is well covered and Graphite India is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Graphite 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 24% over the next three years. As a result, the expected drop in Graphite India's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Conclusion

On the whole, we do feel that Graphite India has some positive attributes. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.