Declining Stock and Decent Financials: Is The Market Wrong About Good Drinks Australia Ltd (ASX:GDA)?

By
Simply Wall St
Published
May 25, 2021
ASX:GDA

It is hard to get excited after looking at Good Drinks Australia's (ASX:GDA) recent performance, when its stock has declined 2.0% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Good Drinks Australia's ROE in this article.

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 Good Drinks Australia

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 Good Drinks Australia is:

3.7% = AU$2.2m ÷ AU$59m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Good Drinks Australia's Earnings Growth And 3.7% ROE

It is hard to argue that Good Drinks Australia's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.8%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Good Drinks Australia over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Good Drinks Australia's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 0.5% in the same period.

past-earnings-growth
ASX:GDA Past Earnings Growth May 25th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Good Drinks Australia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Good Drinks Australia Making Efficient Use Of Its Profits?

Conclusion

Overall, we feel that Good Drinks Australia certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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 Good Drinks Australia's 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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