Magellanic Cloud Limited's (NSE:MCLOUD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 35% over the past three months, it is easy to disregard Magellanic Cloud (NSE:MCLOUD). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Magellanic Cloud'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 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 Do You Calculate Return On Equity?

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 Magellanic Cloud is:

20% = ₹1.0b ÷ ₹5.2b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.20 in profit.

View our latest analysis for Magellanic Cloud

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Magellanic Cloud's Earnings Growth And 20% ROE

To begin with, Magellanic Cloud seems to have a respectable ROE. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. Probably as a result of this, Magellanic Cloud was able to see an impressive net income growth of 46% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Magellanic Cloud's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 26%.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Magellanic Cloud is trading on a high P/E or a low P/E, relative to its industry.

Is Magellanic Cloud Using Its Retained Earnings Effectively?

Magellanic Cloud's ' three-year median payout ratio is on the lower side at 1.7% implying that it is retaining a higher percentage (98%) of its profits. So it looks like Magellanic Cloud is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Magellanic Cloud has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Magellanic Cloud's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Magellanic Cloud.

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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.