Declining Stock and Decent Financials: Is The Market Wrong About Bata India Limited (NSE:BATAINDIA)?

With its stock down 5.4% over the past three months, it is easy to disregard Bata India (NSE:BATAINDIA). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Bata India’s ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Our analysis indicates that BATAINDIA is potentially overvalued!

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 Bata India is:

16% = ₹2.9b ÷ ₹18b (Based on the trailing twelve months to June 2022).

The ‘return’ refers to a company’s earnings over the last year. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.16 in profit.

What Is The Relationship Between ROE And 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. 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.

Bata India’s Earnings Growth And 16% ROE

At first glance, Bata India seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 12%. Needless to say, we are quite surprised to see that Bata India’s net income shrunk at a rate of 40% over the past five years. We reckon that there could be some other factors at play here that are preventing the company’s growth. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared Bata India’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 18% in the same period.

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. Is Bata India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bata India Making Efficient Use Of Its Profits?

Bata India’s low three-year median payout ratio of 16% (implying that it retains the remaining 84% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn’t be the case when a company is retaining most of its earnings. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Bata India has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 22% over the next three years. Still, forecasts suggest that Bata India’s future ROE will rise to 21% even though the the company’s payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company’s ROE.

Conclusion

Overall, we feel that Bata India certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.