Stock Analysis

Britannia Industries Limited's (NSE:BRITANNIA) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

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NSEI:BRITANNIA
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With its stock down 5.7% over the past three months, it is easy to disregard Britannia Industries (NSE:BRITANNIA). 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 Britannia Industries' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Britannia Industries

How To 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 Britannia Industries is:

66% = ₹18b ÷ ₹27b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.66 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Britannia Industries' Earnings Growth And 66% ROE

To begin with, Britannia Industries has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. This likely paved the way for the modest 16% net income growth seen by Britannia Industries over the past five years. growth

Next, on comparing Britannia Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% in the same period.

past-earnings-growth
NSEI:BRITANNIA Past Earnings Growth January 5th 2021

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

Is Britannia Industries Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Britannia Industries is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Britannia Industries has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 75% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 44%) over the same period.

Conclusion

Overall, we are quite pleased with Britannia Industries' 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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