Declining Stock and Decent Financials: Is The Market Wrong About Tata Consumer Products Limited (NSE:TATACONSUM)?

With its stock down 13% over the past month, it is easy to disregard Tata Consumer Products (NSE:TATACONSUM). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Tata Consumer Products' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Tata Consumer Products

How Is ROE Calculated?

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 Tata Consumer Products is:

4.1% = ₹6.2b ÷ ₹149b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.04.

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. 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.

Tata Consumer Products' Earnings Growth And 4.1% ROE

As you can see, Tata Consumer Products' ROE looks pretty weak. Not just that, even compared to the industry average of 10.0%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Tata Consumer Products grew its net income at a significant rate of 21% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Tata Consumer Products' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Tata Consumer Products''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tata Consumer Products Making Efficient Use Of Its Profits?

Tata Consumer Products' three-year median payout ratio is a pretty moderate 37%, meaning the company retains 63% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Tata Consumer Products is reinvesting its earnings efficiently.

Besides, Tata Consumer Products has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 33%. Still, forecasts suggest that Tata Consumer Products' future ROE will rise to 7.2% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Tata Consumer Products has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. 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.
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