Is UltraTech Cement Limited's (NSE:ULTRACEMCO) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that UltraTech Cement's (NSE:ULTRACEMCO) stock increased significantly by 10% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to UltraTech Cement's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for UltraTech Cement is:

10.0% = ₹63b ÷ ₹628b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.10 in profit.

Check out our latest analysis for UltraTech Cement

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

UltraTech Cement's Earnings Growth And 10.0% ROE

When you first look at it, UltraTech Cement's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.3% doesn't go unnoticed by us. Yet, UltraTech Cement has posted measly growth of 4.0% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

Next, on comparing with the industry net income growth, we found that UltraTech Cement's reported growth was lower than the industry growth of 5.5% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is UltraTech Cement fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is UltraTech Cement Efficiently Re-investing Its Profits?

UltraTech Cement's low three-year median payout ratio of 22% (or a retention ratio of 78%) 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.

Additionally, UltraTech Cement has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 21%. Regardless, the future ROE for UltraTech Cement is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that UltraTech Cement has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.