Do Its Financials Have Any Role To Play In Driving G N A Axles Limited's (NSE:GNA) Stock Up Recently?

G N A Axles (NSE:GNA) has had a great run on the share market with its stock up by a significant 12% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study G N A Axles' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 G N A Axles

How To 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 G N A Axles is:

6.2% = ₹286m ÷ ₹4.6b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.06.

Why Is ROE Important For Earnings Growth?

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

G N A Axles' Earnings Growth And 6.2% ROE

It is hard to argue that G N A Axles' ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 5.5% either. So we are actually pleased to see that G N A Axles' net income grew at an acceptable rate of 8.7% over the last five years. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that G N A Axles' growth is quite high when compared to the industry average growth of 2.9% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. Is G N A Axles fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is G N A Axles Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we feel that G N A Axles certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 2 risks we have identified for G N A Axles by visiting our risks dashboard for free on our platform here.

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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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