Will Weakness in Adani Ports and Special Economic Zone Limited's (NSE:ADANIPORTS) Stock Prove Temporary Given Strong Fundamentals?

Adani Ports and Special Economic Zone (NSE:ADANIPORTS) has had a rough three months with its share price down 4.5%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Adani Ports and Special Economic Zone's 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?

ROE 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 Adani Ports and Special Economic Zone is:

17% = ₹113b ÷ ₹650b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.17 in profit.

Check out our latest analysis for Adani Ports and Special Economic Zone

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. 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.

Adani Ports and Special Economic Zone's Earnings Growth And 17% ROE

To begin with, Adani Ports and Special Economic Zone seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. Consequently, this likely laid the ground for the impressive net income growth of 23% seen over the past five years by Adani Ports and Special Economic Zone. We believe that there might also be other aspects that are positively influencing the company's earnings 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.

Next, on comparing with the industry net income growth, we found that Adani Ports and Special Economic Zone's reported growth was lower than the industry growth of 29% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Adani Ports and Special Economic Zone is trading on a high P/E or a low P/E, relative to its industry.

Is Adani Ports and Special Economic Zone Making Efficient Use Of Its Profits?

Adani Ports and Special Economic Zone's ' three-year median payout ratio is on the lower side at 15% implying that it is retaining a higher percentage (85%) of its profits. So it looks like Adani Ports and Special Economic Zone is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Adani Ports and Special Economic Zone has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 13%. Accordingly, forecasts suggest that Adani Ports and Special Economic Zone's future ROE will be 18% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Adani Ports and Special Economic Zone's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.