Crompton Greaves Consumer Electricals Limited's (NSE:CROMPTON) Stock Is Going Strong: Is the Market Following Fundamentals?

Crompton Greaves Consumer Electricals (NSE:CROMPTON) has had a great run on the share market with its stock up by a significant 9.4% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Crompton Greaves Consumer Electricals' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Crompton Greaves Consumer Electricals

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 Crompton Greaves Consumer Electricals is:

15% = ₹4.8b ÷ ₹31b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.15 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Crompton Greaves Consumer Electricals' Earnings Growth And 15% ROE

To start with, Crompton Greaves Consumer Electricals' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.8%. This probably laid the ground for Crompton Greaves Consumer Electricals' moderate 10% net income growth seen over the past five years.

We then performed a comparison between Crompton Greaves Consumer Electricals' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Crompton Greaves Consumer Electricals is trading on a high P/E or a low P/E, relative to its industry.

Is Crompton Greaves Consumer Electricals Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Crompton Greaves Consumer Electricals is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Crompton Greaves Consumer Electricals is determined to keep sharing its profits with shareholders which we infer from its long history of six 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 34%. However, Crompton Greaves Consumer Electricals' ROE is predicted to rise to 21% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Crompton Greaves Consumer Electricals' 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 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.