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

Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT) has had a rough three months with its share price down 18%. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

Return on equity 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 Chambal Fertilisers and Chemicals is:

19% = ₹19b ÷ ₹98b (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.19.

View 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. 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.

A Side By Side comparison of 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 9.8% the company's ROE looks pretty impressive. Despite this, Chambal Fertilisers and Chemicals' five year net income growth was quite flat over the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Chambal Fertilisers and Chemicals' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.3% in the same period.

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 Chambal Fertilisers and Chemicals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chambal Fertilisers and Chemicals Efficiently Re-investing Its Profits?

Chambal Fertilisers and Chemicals' low three-year median payout ratio of 24% (implying that the company keeps76% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, Chambal Fertilisers and Chemicals 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 18% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, it does look like Chambal Fertilisers and Chemicals has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink slightly 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.