It’s hard to get excited after watching the recent performance of Motherson Sumi Systems (NSE:MOTHERSUMI), as its stock is down 20% in the past three months. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In this article, we decided to focus on the ROE of Motherson Sumi Systems.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Motherson Sumi Systems
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Motherson Sumi Systems is:
14% = ₹24 billion ÷ ₹168 billion (based on the last twelve months to September 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.14.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Motherson Sumi Systems Earnings Growth and 14% ROE
At first glance, Motherson Sumi Systems’ ROE does not look very promising. However, the fact that its ROE is well above the industry average of 11% does not go unnoticed by us. However, Motherson Sumi Systems’ five-year net income decline rate was 13%. Keep in mind that the company’s ROE is a bit low to start with, just that it’s above the industry average. Therefore, lower revenue could also be the result.
Moreover, even relative to the industry, which has cut profits at a rate of 2.1% over the same period, we found Motherson Sumi Systems’ performance to be quite disappointing, as it suggests that the he company cut profits at a faster rate than the industry.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the stock is set for a bright or bleak future. A 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 outlook. Thus, you might want to check whether Motherson Sumi Systems is trading on a high P/E or a low P/E, relative to its industry.
Does Motherson Sumi Systems effectively reinvest its profits?
Despite a normal three-year median payout ratio of 29% (where it retains 71% of its earnings), Motherson Sumi Systems has seen declining earnings, as seen above. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, Motherson Sumi Systems has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘business. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 32%. Still, forecasts suggest Motherson Sumi Systems’ future ROE will rise to 22%, even though the company’s payout ratio isn’t expected to change much.
All in all, it seems that Motherson Sumi Systems has positive aspects for its business. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.