Indian Railway Catering & Tourism Corporation Limited's (NSE:IRCTC) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
April 11, 2022
NSEI:IRCTC
Source: Shutterstock

It is hard to get excited after looking at Indian Railway Catering & Tourism's (NSE:IRCTC) recent performance, when its stock has declined 9.5% 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. In this article, we decided to focus on Indian Railway Catering & Tourism's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Indian Railway Catering & Tourism

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 Indian Railway Catering & Tourism is:

34% = ₹5.5b ÷ ₹16b (Based on the trailing twelve months to December 2021).

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 ₹0.34 in profit.

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Indian Railway Catering & Tourism's Earnings Growth And 34% ROE

To begin with, Indian Railway Catering & Tourism has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.3% also doesn't go unnoticed by us. This likely paved the way for the modest 11% net income growth seen by Indian Railway Catering & Tourism over the past five years. growth

We then compared Indian Railway Catering & Tourism's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.3% in the same period.

past-earnings-growth
NSEI:IRCTC Past Earnings Growth April 11th 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Indian Railway Catering & Tourism's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Indian Railway Catering & Tourism is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Along with seeing a growth in earnings, Indian Railway Catering & Tourism only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. 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 41%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 30%.

Conclusion

Overall, we are quite pleased 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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