Stock Analysis

Do Its Financials Have Any Role To Play In Driving Good Drinks Australia Limited's (ASX:GDA) Stock Up Recently?

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Good Drinks Australia's (ASX:GDA) stock is up by a considerable 13% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Good Drinks Australia's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Good Drinks Australia

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 Good Drinks Australia is:

1.0% = AU\$638k ÷ AU\$66m (Based on the trailing twelve months to December 2022).

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\$0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Good Drinks Australia's Earnings Growth And 1.0% ROE

It is hard to argue that Good Drinks Australia's ROE is much good in and of itself. Even compared to the average industry ROE of 5.7%, the company's ROE is quite dismal. However, the moderate 7.1% net income growth seen by Good Drinks Australia over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

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 7.1% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Good Drinks Australia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Good Drinks Australia Using Its Retained Earnings Effectively?

Good Drinks Australia doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

On the whole, we do feel that Good Drinks Australia has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Good Drinks Australia by visiting our risks dashboard for free on our platform here.

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