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

By
Simply Wall St
Published
May 24, 2021
NSEI:CONFIPET
Source: Shutterstock

Confidence Petroleum India (NSE:CONFIPET) has had a great run on the share market with its stock up by a significant 48% 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. In this article, we decided to focus on Confidence Petroleum India's ROE.

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.

See our latest analysis for Confidence Petroleum India

How To Calculate Return On Equity?

Return on equity 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. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Confidence Petroleum India's Earnings Growth And 5.8% ROE

It is hard to argue that Confidence Petroleum India's ROE is much good in and of itself. Not just that, even compared to the industry average of 9.7%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Confidence Petroleum India grew its net income at a significant rate of 41% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

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 8.5% in the same period, which is great to see.

past-earnings-growth
NSEI:CONFIPET Past Earnings Growth May 25th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Making Efficient Use Of Its Profits?

Confidence Petroleum India's ' three-year median payout ratio is on the lower side at 4.3% implying that it is retaining a higher percentage (96%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

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. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. To know the 2 risks we have identified for Confidence Petroleum India visit our risks dashboard for free.

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