Are Strong Financial Prospects The Force That Is Driving The Momentum In GI Engineering Solutions Limited's NSE:GISOLUTION) Stock?

Most readers would already be aware that GI Engineering Solutions' (NSE:GISOLUTION) stock increased significantly by 14% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to GI Engineering Solutions' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for GI Engineering Solutions

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for GI Engineering Solutions is:

33% = ₹14m ÷ ₹44m (Based on the trailing twelve months to December 2022).

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 ₹0.33.

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. 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.

A Side By Side comparison of GI Engineering Solutions' Earnings Growth And 33% ROE

First thing first, we like that GI Engineering Solutions has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 8.4% which is quite remarkable. So, the substantial 21% net income growth seen by GI Engineering Solutions over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that GI Engineering Solutions' growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about GI Engineering Solutions''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GI Engineering Solutions Using Its Retained Earnings Effectively?

Given that GI Engineering Solutions doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with GI Engineering Solutions' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for GI Engineering Solutions visit our risks dashboard for free.

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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.