Is Gabriel India Limited's (NSE:GABRIEL) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Gabriel India's (NSE:GABRIEL) stock is up by a considerable 12% over the past month. 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 Gabriel India's ROE.

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.

See our latest analysis for Gabriel India

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Gabriel India is:

7.9% = ₹510m ÷ ₹6.5b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Gabriel India's Earnings Growth And 7.9% ROE

It is quite clear that Gabriel India's ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 5.5% so that's certainly interesting. Still, Gabriel India has seen a flat net income growth over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the disappointing earnings growth.

As a next step, we compared Gabriel India's net income growth with the industry and discovered that the industry saw an average growth of 2.9% 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Gabriel India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gabriel India Efficiently Re-investing Its Profits?

Gabriel India has a low three-year median payout ratio of 22% (or a retention ratio of 78%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Additionally, Gabriel India has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we do feel that Gabriel India has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate 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 Gabriel India'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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