Declining Stock and Solid Fundamentals: Is The Market Wrong About Castrol India Limited (NSE:CASTROLIND)?

With its stock down 9.7% over the past month, it is easy to disregard Castrol India (NSE:CASTROLIND). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Castrol India'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

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 Castrol India is:

53% = ₹9.6b ÷ ₹18b (Based on the trailing twelve months to June 2025).

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 ₹0.53 in profit.

View our latest analysis for Castrol India

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Castrol India's Earnings Growth And 53% ROE

First thing first, we like that Castrol India has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. This likely paved the way for the modest 7.5% net income growth seen by Castrol India over the past five years.

As a next step, we compared Castrol India's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.4% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Castrol India is trading on a high P/E or a low P/E, relative to its industry.

Is Castrol India Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 83% (or a retention ratio of 17%) for Castrol India suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Castrol India 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.

Summary

Overall, we are quite pleased with Castrol India's performance. 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.