Is Colgate-Palmolive (India) Limited's (NSE:COLPAL) Latest Stock Performance Being Led By Its Strong Fundamentals?

Colgate-Palmolive (India)'s (NSE:COLPAL) stock up by 3.8% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Colgate-Palmolive (India)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Colgate-Palmolive (India)

How Do You Calculate Return On Equity?

Return on equity 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 Colgate-Palmolive (India) is:

54% = ₹8.8b ÷ ₹16b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.54.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Colgate-Palmolive (India)'s Earnings Growth And 54% ROE

To begin with, Colgate-Palmolive (India) has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. Probably as a result of this, Colgate-Palmolive (India) was able to see a decent net income growth of 9.5% over the last five years.

Next, on comparing Colgate-Palmolive (India)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.7% 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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Colgate-Palmolive (India) is trading on a high P/E or a low P/E, relative to its industry.

Is Colgate-Palmolive (India) Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 57% (or a retention ratio of 43%) for Colgate-Palmolive (India) suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Colgate-Palmolive (India) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Colgate-Palmolive (India)'s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Colgate-Palmolive (India)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

When trading Colgate-Palmolive (India) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.