Bayer CropScience Limited's (NSE:BAYERCROP) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.8% over the past three months, it is easy to disregard Bayer CropScience (NSE:BAYERCROP). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Bayer CropScience's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Bayer CropScience is:

21% = ₹5.9b ÷ ₹29b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.21.

Check out our latest analysis for Bayer CropScience

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. 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.

Bayer CropScience's Earnings Growth And 21% ROE

At first glance, Bayer CropScience seems to have a decent ROE. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. However, for some reason, the higher returns aren't reflected in Bayer CropScience's meagre five year net income growth average of 3.9%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Bayer CropScience's reported growth was lower than the industry growth of 9.3% over the last few years, which is not something we like to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Bayer CropScience is trading on a high P/E or a low P/E, relative to its industry.

Is Bayer CropScience Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 80% (that is, the company retains only 20% of its income) over the past three years for Bayer CropScience suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Bayer CropScience has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 83%. Still, forecasts suggest that Bayer CropScience's future ROE will rise to 29% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Bayer CropScience has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.