Garware Technical Fibres Limited's (NSE:GARFIBRES) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Garware Technical Fibres' (NSE:GARFIBRES) stock increased significantly by 26% over the past three months. 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 Garware Technical Fibres' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Garware Technical Fibres is:

20% = ₹2.3b ÷ ₹11b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.20.

View our latest analysis for Garware Technical Fibres

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Garware Technical Fibres' Earnings Growth And 20% ROE

To begin with, Garware Technical Fibres seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.9%. This probably laid the ground for Garware Technical Fibres' moderate 10% net income growth seen over the past five years.

As a next step, we compared Garware Technical Fibres' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% in the same period.

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. Is Garware Technical Fibres fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Garware Technical Fibres Making Efficient Use Of Its Profits?

In Garware Technical Fibres' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.2% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.

Besides, Garware Technical Fibres has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 9.4% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we are pretty happy with Garware Technical Fibres' 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 respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.