Declining Stock and Solid Fundamentals: Is The Market Wrong About The Bombay Burmah Trading Corporation Limited (NSE:BBTC)?

With its stock down 4.6% over the past week, it is easy to disregard Bombay Burmah Trading (NSE:BBTC). 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. In this article, we decided to focus on Bombay Burmah Trading'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 Bombay Burmah Trading is:

28% = ₹22b ÷ ₹78b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.28 in profit.

View our latest analysis for Bombay Burmah Trading

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Bombay Burmah Trading's Earnings Growth And 28% ROE

To begin with, Bombay Burmah Trading has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 6.5% net income growth seen by Bombay Burmah Trading over the past five years.

Next, on comparing with the industry net income growth, we found that Bombay Burmah Trading's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Bombay Burmah Trading fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bombay Burmah Trading Using Its Retained Earnings Effectively?

Bombay Burmah Trading has a low three-year median payout ratio of 1.3%, meaning that the company retains the remaining 99% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Bombay Burmah Trading is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with Bombay Burmah Trading's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising.

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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.