Power & Instrumental (Gujarat) Limited's (NSE:PIGL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Power & Instrumental (Gujarat)'s (NSE:PIGL) stock is up by a considerable 54% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Power & Instrumental (Gujarat)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Power & Instrumental (Gujarat)

How Is ROE Calculated?

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 Power & Instrumental (Gujarat) is:

9.6% = ₹93m ÷ ₹963m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.10 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. 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. 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 Power & Instrumental (Gujarat)'s Earnings Growth And 9.6% ROE

When you first look at it, Power & Instrumental (Gujarat)'s ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. As a result, Power & Instrumental (Gujarat)'s flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Power & Instrumental (Gujarat)'s net income growth with the industry and discovered that the industry saw an average growth of 31% in the same period.

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. 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 Power & Instrumental (Gujarat) is trading on a high P/E or a low P/E, relative to its industry.

Is Power & Instrumental (Gujarat) Making Efficient Use Of Its Profits?

Power & Instrumental (Gujarat)'s low three-year median payout ratio of 5.1% (implying that the company keeps95% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

Additionally, Power & Instrumental (Gujarat) started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Power & Instrumental (Gujarat). Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. You can do your own research on Power & Instrumental (Gujarat) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.