Hindustan Unilever Limited's (NSE:HINDUNILVR) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Hindustan Unilever's (NSE:HINDUNILVR) stock increased significantly by 8.6% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Hindustan Unilever'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Our free stock report includes 1 warning sign investors should be aware of before investing in Hindustan Unilever. Read for free now.

How Is ROE Calculated?

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 Hindustan Unilever is:

21% = ₹108b ÷ ₹510b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.21 in profit.

See our latest analysis for Hindustan Unilever

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. 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.

A Side By Side comparison of Hindustan Unilever's Earnings Growth And 21% ROE

To begin with, Hindustan Unilever seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 16%. This certainly adds some context to Hindustan Unilever's decent 9.7% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Hindustan Unilever's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Hindustan Unilever fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hindustan Unilever Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 91% (or a retention ratio of 9.2%) for Hindustan Unilever suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Hindustan Unilever 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. 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 86%. As a result, Hindustan Unilever's ROE is not expected to change by much either, which we inferred from the analyst estimate of 24% for future ROE.

Conclusion

Overall, we feel that Hindustan Unilever certainly does have some positive factors to consider. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.