Are Honeywell Automation India Limited's (NSE:HONAUT) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Honeywell Automation India's (NSE:HONAUT) recent performance, when its stock has declined 3.3% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Honeywell Automation India's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Honeywell Automation India is:

13% = ₹5.1b ÷ ₹40b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.13 in profit.

See our latest analysis for Honeywell Automation India

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. 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.

Honeywell Automation India's Earnings Growth And 13% ROE

When you first look at it, Honeywell Automation India's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. On the other hand, Honeywell Automation India reported a fairly low 4.2% net income growth over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

As a next step, we compared Honeywell Automation India's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 28% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Honeywell Automation India's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Honeywell Automation India Using Its Retained Earnings Effectively?

Honeywell Automation India's low three-year median payout ratio of 18% (or a retention ratio of 82%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Honeywell Automation India 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 21% of its profits over the next three years. Accordingly, forecasts suggest that Honeywell Automation India's future ROE will be 15% which is again, similar to the current ROE.

Summary

In total, we're a bit ambivalent about Honeywell Automation India's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.