Is Weakness In Schaeffler India Limited (NSE:SCHAEFFLER) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 2.9% over the past three months, it is easy to disregard Schaeffler India (NSE:SCHAEFFLER). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Schaeffler India's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

The formula for ROE is:

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

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

19% = ₹10b ÷ ₹54b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.19 in profit.

See our latest analysis for Schaeffler 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Schaeffler India's Earnings Growth And 19% ROE

At first glance, Schaeffler India seems to have a decent ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. This probably laid the ground for Schaeffler India's significant 21% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings 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 with the industry net income growth, we found that Schaeffler India's reported growth was lower than the industry growth of 27% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Schaeffler India is trading on a high P/E or a low P/E, relative to its industry.

Is Schaeffler India Using Its Retained Earnings Effectively?

The three-year median payout ratio for Schaeffler India is 45%, which is moderately low. The company is retaining the remaining 55%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Schaeffler India is reinvesting its earnings efficiently.

Moreover, Schaeffler 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 37%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Summary

In total, we are pretty happy with Schaeffler India's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.