Castrol India (NSE: CASTROLIND) shares rose 6.1% in the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of Castrol India.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Castrol India
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Castrol India is:
51% = ₹ 7.8b ÷ ₹ 15b (based on the last twelve months up to June 2021).
The “return” is the annual profit. This means that for every 1 of equity, the company generated ₹ 0.51 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Castrol India’s 51% profit growth and ROE
First of all, we love that Castrol India has an impressive ROE. Secondly, a comparison with the industry-reported average ROE of 16% doesn’t go unnoticed for us either. Despite this, Castrol India’s five-year net income growth has been fairly stable over the past five years. We believe there might be other factors at play here that are limiting the growth of the business. These include low profit retention or poor capital allocation.
Then, comparing with the industry net income growth, we found that the reported growth of Castrol India was lower than the industry growth of 18% during the same period, which is not something we love to see.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Castrol India properly rated against other companies? These 3 evaluation measures could help you decide.
Is Castrol India Using Profits Effectively?
Castrol India has a high three-year median payout rate of 70% (or a retention rate of 30%), which means the company pays out most of its profits as dividends to its shareholders. This partly explains why there has been no growth in its profits.
Additionally, Castrol India has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we think Castrol India definitely has some positive factors to consider. Still, the low profit growth is a bit of a concern, especially since the company has a high rate of return. Investors could have benefited from the high ROE if the company had reinvested more of its profits. As previously stated, the company retains a small portion of its profits. So far, we’ve only scratched the surface of the company’s past performance by examining the fundamentals of the business. You can do your own research on Castrol India and see how it has performed in the past by checking out this FREE detailed graphic past earnings, income and cash flow.
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