Is Marico Limited's(NSE:MARICO) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
February 11, 2021
NSEI:MARICO
Source: Shutterstock

Marico (NSE:MARICO) has had a great run on the share market with its stock up by a significant 13% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Marico's ROE today.

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.

See our latest analysis for Marico

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 Marico is:

32% = ₹12b ÷ ₹37b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.32 in profit.

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Marico's Earnings Growth And 32% ROE

Firstly, we acknowledge that Marico has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. This likely paved the way for the modest 11% net income growth seen by Marico over the past five years. growth

We then performed a comparison between Marico's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same period.

past-earnings-growth
NSEI:MARICO Past Earnings Growth February 12th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Marico's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Marico Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Marico suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Marico 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 80% of its profits over the next three years. As a result, Marico's ROE is not expected to change by much either, which we inferred from the analyst estimate of 37% for future ROE.

Conclusion

On the whole, we feel that Marico's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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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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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