I G Petrochemicals Limited (NSE:IGPL) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

I G Petrochemicals' (NSE:IGPL) stock is up by a considerable 94% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on I G Petrochemicals' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for I G Petrochemicals

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for I G Petrochemicals is:

2.2% = ₹140m ÷ ₹6.3b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.02 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 I G Petrochemicals' Earnings Growth And 2.2% ROE

It is quite clear that I G Petrochemicals' ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. As a result, I G Petrochemicals' flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared I G Petrochemicals' net income growth with the industry and discovered that the industry saw an average growth of 17% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is I G Petrochemicals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is I G Petrochemicals Making Efficient Use Of Its Profits?

I G Petrochemicals has a low three-year median payout ratio of 11% (or a retention ratio of 89%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, I G Petrochemicals has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we're a bit ambivalent about I G Petrochemicals' performance. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of I G Petrochemicals' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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