Has Confidence Petroleum India Limited's (NSE:CONFIPET) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Confidence Petroleum India's (NSE:CONFIPET) stock is up by a considerable 67% over the past 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 Confidence Petroleum India's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Confidence Petroleum 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 Confidence Petroleum India is:

5.8% = ₹280m ÷ ₹4.8b (Based on the trailing twelve months to December 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.

What Has ROE Got To Do With 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.

Confidence Petroleum India's Earnings Growth And 5.8% ROE

As you can see, Confidence Petroleum India's ROE looks pretty weak. Even compared to the average industry ROE of 9.0%, the company's ROE is quite dismal. Despite this, surprisingly, Confidence Petroleum India saw an exceptional 41% net income growth over the past five years. We reckon that there could be other factors at play here. 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 Confidence Petroleum India's growth is quite high when compared to the industry average growth of 7.7% in the same period, which is great to see.

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 Confidence Petroleum India is trading on a high P/E or a low P/E, relative to its industry.

Is Confidence Petroleum India Using Its Retained Earnings Effectively?

Confidence Petroleum India's three-year median payout ratio to shareholders is 4.3%, which is quite low. This implies that the company is retaining 96% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Confidence Petroleum India is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

On the whole, we do feel that Confidence Petroleum India has some positive attributes. 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. Our risks dashboard would have the 2 risks we have identified for Confidence Petroleum India.

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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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