Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Bajaj Electricals Limited (NSE:BAJAJELEC)?

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NSEI:BAJAJELEC

With its stock down 16% over the past three months, it is easy to disregard Bajaj Electricals (NSE:BAJAJELEC). 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 Bajaj Electricals' 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.

See our latest analysis for Bajaj Electricals

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 Bajaj Electricals is:

7.4% = ₹1.1b ÷ ₹15b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

What Has ROE Got To Do With 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 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.

Bajaj Electricals' Earnings Growth And 7.4% ROE

It is hard to argue that Bajaj Electricals' ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 8.1% either. However, the exceptional 20% net income growth seen by Bajaj Electricals over the past five years is pretty remarkable. Considering the low ROE, it is quite possible that there might also be some 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.

As a next step, we compared Bajaj Electricals' 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 20% in the same period.

NSEI:BAJAJELEC Past Earnings Growth January 18th 2025

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Bajaj Electricals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bajaj Electricals Efficiently Re-investing Its Profits?

Bajaj Electricals' three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. By the looks of it, the dividend is well covered and Bajaj Electricals is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Bajaj Electricals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with 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 23%. Regardless, the future ROE for Bajaj Electricals is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Bajaj Electricals certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Valuation is complex, but we're here to simplify it.

Discover if Bajaj Electricals might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.