Declining Stock and Decent Financials: Is The Market Wrong About Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT)?

With its stock down 23% over the past three months, it is easy to disregard Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Chambal Fertilisers and Chemicals' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 Chambal Fertilisers and Chemicals is:

19% = ₹16b ÷ ₹87b (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.19 in profit.

Check out our latest analysis for Chambal Fertilisers and Chemicals

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Chambal Fertilisers and Chemicals' Earnings Growth And 19% ROE

At first glance, Chambal Fertilisers and Chemicals seems to have a decent ROE. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why Chambal Fertilisers and Chemicals saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Chambal Fertilisers and Chemicals' net income growth with the industry and discovered that the industry saw an average growth of 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for CHAMBLFERT? You can find out in our latest intrinsic value infographic research report.

Is Chambal Fertilisers and Chemicals Using Its Retained Earnings Effectively?

Chambal Fertilisers and Chemicals has a low three-year median payout ratio of 24% (or a retention ratio of 76%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, Chambal Fertilisers and Chemicals has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 24% of its profits over the next three years. However, Chambal Fertilisers and Chemicals' future ROE is expected to decline to 13% despite there being not much change anticipated in the company's payout ratio.

Conclusion

On the whole, we do feel that Chambal Fertilisers and Chemicals has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow, albeit marginally, in the future. 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. 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.