Should Weakness in Motherson Sumi Wiring India Limited's (NSE:MSUMI) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 6.8% over the past three months, it is easy to disregard Motherson Sumi Wiring India (NSE:MSUMI). 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 Motherson Sumi Wiring India's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Motherson Sumi Wiring India is:
33% = ₹6.1b ÷ ₹18b (Based on the trailing twelve months to September 2025).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.33 in profit.
View our latest analysis for Motherson Sumi Wiring India
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Motherson Sumi Wiring India's Earnings Growth And 33% ROE
To begin with, Motherson Sumi Wiring India has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Probably as a result of this, Motherson Sumi Wiring India was able to see a decent net income growth of 9.7% over the last five years.
As a next step, we compared Motherson Sumi Wiring India's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 24% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Motherson Sumi Wiring India fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Motherson Sumi Wiring India Making Efficient Use Of Its Profits?
While Motherson Sumi Wiring India has a three-year median payout ratio of 59% (which means it retains 41% 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, Motherson Sumi Wiring India has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. 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 64%. Regardless, the future ROE for Motherson Sumi Wiring India is predicted to rise to 42% despite there being not much change expected in its payout ratio.
Conclusion
In total, it does look like Motherson Sumi Wiring India has some positive aspects to its business. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.