Is ITC Limited’s (NSE: ITC) recent market performance influenced by its fundamentals in any way?

ITC (NSE: ITC) stock rose 5.2% in the past month. As most know, fundamentals typically guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on ITC’s ROE.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for ITC

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ITC’s ROE is:

23% = ₹ 142b ÷ ₹ 607b (Based on the last twelve months up to June 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every having shareholders, the company generated 0.23 profit.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

ITC profit growth and 23% ROE

For starters, ITC appears to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 18%. This likely laid the foundation for ITC’s moderate 6.3% net income growth seen over the past five years.

We then compared ITC’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 17% over the same period, which is a little worrying.

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. What is ITC worth today? The intrinsic value infographic in our free research report helps to visualize whether ITC is currently being poorly valued by the market.

Is ITC using its retained earnings effectively?

ITC has a large three-year median payout ratio of 81%, which means it only has 19% left to reinvest in its business. This implies that the company has been able to achieve decent profit growth despite returning most of its profits to shareholders.

In addition, ITC has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 84%. As a result, forecasts suggest that ITC’s future ROE will be 27%, which is again similar to the current ROE.

Conclusion

All in all, it seems that ITC has positive aspects for its activities. The company increased its profits moderately, as previously reported. Still, the high ROE could have been even more beneficial for investors if the company had reinvested more of its profits. As noted earlier, the current reinvestment rate appears to be quite low. That said, the latest forecast from industry analysts shows that the company’s profits are expected to pick up. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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