Gujarat Pipavav Port Limited's (NSE:GPPL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Gujarat Pipavav Port's (NSE:GPPL) stock is up by a considerable 24% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Gujarat Pipavav Port'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Gujarat Pipavav Port

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 Gujarat Pipavav Port is:

16% = ₹3.7b ÷ ₹23b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.16 in profit.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Gujarat Pipavav Port's Earnings Growth And 16% ROE

To begin with, Gujarat Pipavav Port seems to have a respectable ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. Despite the moderate return on equity, Gujarat Pipavav Port has posted a net income growth of 4.4% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Gujarat Pipavav Port'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 23% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is GPPL worth today? The intrinsic value infographic in our free research report helps visualize whether GPPL is currently mispriced by the market.

Is Gujarat Pipavav Port Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 95% (or a retention ratio of 4.6%), most of Gujarat Pipavav Port's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Gujarat Pipavav Port has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 67% over the next three years. As a result, the expected drop in Gujarat Pipavav Port's payout ratio explains the anticipated rise in the company's future ROE to 19%, over the same period.

Summary

In total, we're a bit ambivalent about Gujarat Pipavav Port's performance. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.