WEBULL

ITC Limited's (NSE:ITC) Stock Has Fared Decently: Is the Market Following Strong Financials?

Simply Wall St · 05/01 03:59

ITC's (NSE:ITC) stock up by 3.9% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on ITC's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Our free stock report includes 1 warning sign investors should be aware of before investing in ITC. Read for free now.

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for ITC is:

27% = ₹204b ÷ ₹758b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.27 in profit.

See our latest analysis for ITC

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

ITC's Earnings Growth And 27% ROE

Firstly, we acknowledge that ITC has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. This probably laid the groundwork for ITC's moderate 9.8% net income growth seen over the past five years.

As a next step, we compared ITC's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.5%.

past-earnings-growth
NSEI:ITC Past Earnings Growth May 1st 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is ITC fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ITC Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 84% (or a retention ratio of 16%) for ITC suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, ITC 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 89%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 30%.

Conclusion

In total, we are pretty happy with ITC's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.