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華爾街日報Could The Market Be Wrong About Castrol India Limited (NSE:CASTROLIND) Given Its Attractive Financial Prospects?
Castrol India (NSE:CASTROLIND) has had a rough three months with its share price down 6.6%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Castrol India's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You 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 Castrol India is:
54% = ₹9.8b ÷ ₹18b (Based on the trailing twelve months to September 2025).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.54 in profit.
View our latest analysis for Castrol India
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Castrol India's Earnings Growth And 54% ROE
Firstly, we acknowledge that Castrol India has a significantly high ROE. Secondly, even when compared to the industry average of 9.9% the company's ROE is quite impressive. This probably laid the groundwork for Castrol India's moderate 7.4% net income growth seen over the past five years.
As a next step, we compared Castrol India's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.6% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for CASTROLIND? You can find out in our latest intrinsic value infographic research report.
Is Castrol India Using Its Retained Earnings Effectively?
While Castrol India has a three-year median payout ratio of 86% (which means it retains 14% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.
Besides, Castrol India has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 89%. As a result, Castrol India's ROE is not expected to change by much either, which we inferred from the analyst estimate of 49% for future ROE.
Conclusion
In total, we are pretty happy with Castrol India's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.
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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.