Should Weakness in G N A Axles Limited's (NSE:GNA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 11% over the past three months, it is easy to disregard G N A Axles (NSE:GNA). 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 G N A Axles' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Do You Calculate Return On Equity?

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 G N A Axles is:

12% = ₹1.1b ÷ ₹9.0b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.12 in profit.

See our latest analysis for G N A Axles

What Has ROE Got To Do With 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 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.

G N A Axles' Earnings Growth And 12% ROE

On the face of it, G N A Axles' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 12%, we may spare it some thought. On the other hand, G N A Axles reported a moderate 15% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that G N A Axles' reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 G N A Axles is trading on a high P/E or a low P/E, relative to its industry.

Is G N A Axles Using Its Retained Earnings Effectively?

G N A Axles has a low three-year median payout ratio of 9.9%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, G N A Axles has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that G N A Axles 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.