Will Weakness in Whirlpool of India Limited's (NSE:WHIRLPOOL) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
April 19, 2022
NSEI:WHIRLPOOL
Source: Shutterstock

Whirlpool of India (NSE:WHIRLPOOL) has had a rough three months with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Whirlpool of India's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Whirlpool of India

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Whirlpool of India is:

18% = ₹6.1b ÷ ₹34b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.18.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Whirlpool of India's Earnings Growth And 18% ROE

At first glance, Whirlpool of India seems to have a decent ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Probably as a result of this, Whirlpool of India was able to see a decent growth of 8.4% over the last five years.

We then performed a comparison between Whirlpool of India's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.3% in the same period.

past-earnings-growth
NSEI:WHIRLPOOL Past Earnings Growth April 19th 2022

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 Whirlpool of India is trading on a high P/E or a low P/E, relative to its industry.

Is Whirlpool of India Making Efficient Use Of Its Profits?

Whirlpool of India has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Whirlpool of India has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Whirlpool of India's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Whirlpool of India.

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