Declining Stock and Decent Financials: Is The Market Wrong About Amara Raja Energy & Mobility Limited (NSE:ARE&M)?

Simply Wall St · 04/16 01:14

Amara Raja Energy & Mobility (NSE:ARE&M) has had a rough three months with its share price down 5.3%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Amara Raja Energy & Mobility's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Do You Calculate Return On Equity?

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 Amara Raja Energy & Mobility is:

14% = ₹10b ÷ ₹73b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax 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 ₹0.14 in profit.

Check out our latest analysis for Amara Raja Energy & Mobility

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Amara Raja Energy & Mobility's Earnings Growth And 14% ROE

At first glance, Amara Raja Energy & Mobility's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 15%, we may spare it some thought. Having said that, Amara Raja Energy & Mobility has shown a modest net income growth of 11% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Amara Raja Energy & Mobility's reported growth was lower than the industry growth of 32% over the last few years, which is not something we like to see.

past-earnings-growth
NSEI:ARE&M Past Earnings Growth April 16th 2025

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Amara Raja Energy & Mobility's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Amara Raja Energy & Mobility Using Its Retained Earnings Effectively?

Amara Raja Energy & Mobility's three-year median payout ratio to shareholders is 17% (implying that it retains 83% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Amara Raja Energy & Mobility is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 16% of its profits over the next three years. As a result, Amara Raja Energy & Mobility's ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Conclusion

On the whole, we do feel that Amara Raja Energy & Mobility has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.