Federal-Mogul Goetze (India) Limited's (NSE:FMGOETZE) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Federal-Mogul Goetze (India)'s (NSE:FMGOETZE) stock is up by a considerable 9.5% over the past week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Federal-Mogul Goetze (India)'s ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Federal-Mogul Goetze (India)

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 Federal-Mogul Goetze (India) is:

1.4% = ₹123m ÷ ₹8.5b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.01 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. 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.

Federal-Mogul Goetze (India)'s Earnings Growth And 1.4% ROE

It is quite clear that Federal-Mogul Goetze (India)'s ROE is rather low. Not just that, even compared to the industry average of 6.0%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 30% seen by Federal-Mogul Goetze (India) over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.3% in the same period, we found that Federal-Mogul Goetze (India)'s performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Federal-Mogul Goetze (India) is trading on a high P/E or a low P/E, relative to its industry.

Is Federal-Mogul Goetze (India) Using Its Retained Earnings Effectively?

Summary

On the whole, we feel that the performance shown by Federal-Mogul Goetze (India) can be open to many interpretations. 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. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Federal-Mogul Goetze (India) visit our risks dashboard for free.

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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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