Does The Market Have A Low Tolerance For Johnson Controls-Hitachi Air Conditioning India Limited’s (NSE:JCHAC) Mixed Fundamentals?

Johnson Controls-Hitachi Air Conditioning India (NSE:JCHAC) has had a rough three months with its share price down 14%. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Particularly, we will be paying attention to Johnson Controls-Hitachi Air Conditioning 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Johnson Controls-Hitachi Air Conditioning India

How To 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 Johnson Controls-Hitachi Air Conditioning India is:

6.4% = ₹449m ÷ ₹7.0b (Based on the trailing twelve months to December 2021).

The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.06 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. 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.

A Side By Side comparison of Johnson Controls-Hitachi Air Conditioning India’s Earnings Growth And 6.4% ROE

It is hard to argue that Johnson Controls-Hitachi Air Conditioning India’s ROE is much good in and of itself. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 19% seen by Johnson Controls-Hitachi Air Conditioning India was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.

That being said, we compared Johnson Controls-Hitachi Air Conditioning India’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 9.3% in the same period.

NSEI:JCHAC Past Earnings Growth February 25th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Johnson Controls-Hitachi Air Conditioning India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Johnson Controls-Hitachi Air Conditioning India Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn’t pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Summary

Overall, we have mixed feelings about Johnson Controls-Hitachi Air Conditioning India. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Johnson Controls-Hitachi Air Conditioning India.

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.