GP Petroleums Limited's (NSE:GULFPETRO) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

GP Petroleums' (NSE:GULFPETRO) stock is up by a considerable 10% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study GP Petroleums' 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.

View our latest analysis for GP Petroleums

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 GP Petroleums is:

5.1% = ₹114m ÷ ₹2.2b (Based on the trailing twelve months to September 2020).

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 ₹0.05.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

GP Petroleums' Earnings Growth And 5.1% ROE

It is quite clear that GP Petroleums' ROE is rather low. Even when compared to the industry average of 7.1%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by GP Petroleums over the past five years could probably be the result of it having a lower ROE.

Next, on comparing GP Petroleums' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 0.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about GP Petroleums''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GP Petroleums Using Its Retained Earnings Effectively?

GP Petroleums' low three-year median payout ratio of 24%, (meaning the company retains76% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, GP Petroleums has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like GP Petroleums has some positive aspects to its business. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. Up till now, we've only made a short study of the company's growth data. To gain further insights into GP Petroleums' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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