Is Ganesha Ecosphere Limited's(NSE:GANECOS) Recent Stock Performance Tethered To Its Strong Fundamentals?

Ganesha Ecosphere's (NSE:GANECOS) stock is up by a considerable 93% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Ganesha Ecosphere's ROE today.

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.

View our latest analysis for Ganesha Ecosphere

How To 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 Ganesha Ecosphere is:

7.8% = ₹374m ÷ ₹4.8b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.08.

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.

A Side By Side comparison of Ganesha Ecosphere's Earnings Growth And 7.8% ROE

It is quite clear that Ganesha Ecosphere's ROE is rather low. However, when compared to the industry average of 5.6%, we do feel there's definitely more to the company. Especially when you consider Ganesha Ecosphere's exceptional 22% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

As a next step, we compared Ganesha Ecosphere's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.8%.

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. 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 Ganesha Ecosphere's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ganesha Ecosphere Efficiently Re-investing Its Profits?

Ganesha Ecosphere has a really low three-year median payout ratio of 7.6%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Ganesha Ecosphere is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Ganesha Ecosphere has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Ganesha Ecosphere's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Ganesha Ecosphere.

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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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