Procter & Gamble Hygiene and Health Care Limited's (NSE:PGHH) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Procter & Gamble Hygiene and Health Care (NSE:PGHH) has had a rough three months with its share price down 3.9%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Procter & Gamble Hygiene and Health Care's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Procter & Gamble Hygiene and Health Care

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Procter & Gamble Hygiene and Health Care is:

37% = ₹4.3b ÷ ₹12b (Based on the trailing twelve months to June 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 ₹0.37.

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. 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.

Procter & Gamble Hygiene and Health Care's Earnings Growth And 37% ROE

Firstly, we acknowledge that Procter & Gamble Hygiene and Health Care has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. However, we are curious as to how the high returns still resulted in a flat growth for Procter & Gamble Hygiene and Health Care in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Procter & Gamble Hygiene and Health Care's reported growth was lower than the industry growth of 9.9% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Procter & Gamble Hygiene and Health Care's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Procter & Gamble Hygiene and Health Care Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 37% (meaning the company retains63% of profits) in the last three-year period, Procter & Gamble Hygiene and Health Care's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Procter & Gamble Hygiene and Health Care has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that Procter & Gamble Hygiene and Health Care has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 Procter & Gamble Hygiene and Health Care's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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