Magellanic Cloud Limited's (NSE:MCLOUD) Stock Is Going Strong: Is the Market Following Fundamentals?

Magellanic Cloud's (NSE:MCLOUD) stock is up by a considerable 36% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. 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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

How To 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 March 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 ₹0.20.

Check out our latest analysis for Magellanic Cloud

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Magellanic Cloud's Earnings Growth And 20% ROE

At first glance, Magellanic Cloud seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. This probably laid the ground for Magellanic Cloud's significant 50% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

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 27%.

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. 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 Efficiently Re-investing Its Profits?

Magellanic Cloud's three-year median payout ratio to shareholders is 2.3%, which is quite low. This implies that the company is retaining 98% of its profits. So it looks like Magellanic Cloud is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Magellanic Cloud is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

Overall, we are quite pleased with Magellanic Cloud's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Magellanic Cloud.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.