Is the recent stock performance of 3M India Limited (NSE:3MINDIA) influenced by its financials in any way?

Shares of 3M India (NSE:3MINDIA) are up 9.3% over the past three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to take a look at key business financial indicators today to see if they have a role to play. play in the recent price movement. In this article, we have decided to focus on the ROE of 3M India.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for 3M India

How is ROE calculated?

The ROE formula is:

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

So, based on the above formula, the ROE for 3M India is:

15% = ₹3.3 billion ÷ ₹22 billion (based on the last twelve months to June 2022).

The “return” is the annual profit. Another way to think about this is that for every ₹1 worth of equity, the company was able to make a profit of ₹0.15.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently 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 better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

3M India Profit Growth and 15% ROE

For starters, 3M India’s ROE looks acceptable. Compared to the industry average ROE of 11%, the company’s ROE looks quite remarkable. Needless to say, we are quite surprised to see that 3M India’s net income has declined by 6.9% over the past five years. We feel there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.

However, when we compared 3M India’s growth with the industry, we found that although the company’s earnings declined, the industry saw earnings growth of 12% over the same period. . It’s quite worrying.

NSEI: 3MINDIA Past Earnings Growth September 29, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is 3M India correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Is 3M India effectively using its retained earnings?

3M India does not pay any dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Conclusion

Overall, we believe 3M India has positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Valuation is complex, but we help make it simple.

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About Meredith Campagna

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