Declining Stock and Solid Fundamentals: Is The Market Wrong About Indian Railway Catering & Tourism Corporation Limited (NSE:IRCTC)?

It is hard to get excited after looking at Indian Railway Catering & Tourism's (NSE:IRCTC) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Indian Railway Catering & Tourism'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.

See our latest analysis for Indian Railway Catering & Tourism

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Indian Railway Catering & Tourism is:

37% = ₹12b ÷ ₹32b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.37 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Indian Railway Catering & Tourism's Earnings Growth And 37% ROE

Firstly, we acknowledge that Indian Railway Catering & Tourism has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. As a result, Indian Railway Catering & Tourism's exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Indian Railway Catering & Tourism's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Indian Railway Catering & Tourism fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Indian Railway Catering & Tourism Using Its Retained Earnings Effectively?

Indian Railway Catering & Tourism's three-year median payout ratio is a pretty moderate 42%, meaning the company retains 58% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Indian Railway Catering & Tourism is reinvesting its earnings efficiently.

Moreover, Indian Railway Catering & Tourism is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 47%. Accordingly, forecasts suggest that Indian Railway Catering & Tourism's future ROE will be 31% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Indian Railway Catering & Tourism's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.