Will Weakness in Indian Railway Catering & Tourism Corporation Limited's (NSE:IRCTC) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 1.7% over the past week, it is easy to disregard Indian Railway Catering & Tourism (NSE:IRCTC). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Indian Railway Catering & Tourism's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How Do You Calculate Return On Equity?

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% = ₹13b ÷ ₹37b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.37 in profit.

See our latest analysis for Indian Railway Catering & Tourism

What Is The Relationship Between ROE And Earnings Growth?

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

Indian Railway Catering & Tourism's Earnings Growth And 37% ROE

First thing first, we like that Indian Railway Catering & Tourism has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. So, the substantial 28% net income growth seen by Indian Railway Catering & Tourism over the past five years isn't overly surprising.

As a next step, we compared Indian Railway Catering & Tourism'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 30% in the same period.

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. 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?

Indian Railway Catering & Tourism has a three-year median payout ratio of 47% (where it is retaining 53% of its income) which is not too low or not too high. So it seems that Indian Railway Catering & Tourism is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Indian Railway Catering & Tourism is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 61% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

On the whole, we feel that Indian Railway Catering & Tourism's performance has been quite good. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.