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

ITC (NSE:ITC) has had a rough three months with its share price down 1.9%. 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 ITC's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

ROE 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 ITC is:

29% = ₹203b ÷ ₹704b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.29 in profit.

View our latest analysis for ITC

Why Is ROE Important For 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. 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.

ITC's Earnings Growth And 29% ROE

To begin with, ITC has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 23% also doesn't go unnoticed by us. This probably laid the groundwork for ITC's moderate 9.9% net income growth seen over the past five years.

As a next step, we compared ITC's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 18% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about ITC's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ITC Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 85% (or a retention ratio of 15%) for ITC suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, ITC 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 89%. Accordingly, forecasts suggest that ITC's future ROE will be 32% which is again, similar to the current ROE.

Conclusion

Overall, we feel that ITC certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.