Gujarat Ambuja Exports Limited's (NSE:GAEL) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Gujarat Ambuja Exports' (NSE:GAEL) stock increased significantly by 13% 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. In this article, we decided to focus on Gujarat Ambuja Exports' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Gujarat Ambuja Exports

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 Gujarat Ambuja Exports is:

19% = ₹2.7b ÷ ₹14b (Based on the trailing twelve months to December 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 ₹0.19.

Why Is ROE Important For 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 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.

Gujarat Ambuja Exports' Earnings Growth And 19% ROE

At first glance, Gujarat Ambuja Exports seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This probably laid the ground for Gujarat Ambuja Exports' moderate 10% net income growth seen over the past five years.

We then compared Gujarat Ambuja Exports' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Gujarat Ambuja Exports''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gujarat Ambuja Exports Making Efficient Use Of Its Profits?

Gujarat Ambuja Exports' three-year median payout ratio to shareholders is 5.7% (implying that it retains 94% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

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

Summary

In total, we are pretty happy with Gujarat Ambuja Exports' 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. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Gujarat Ambuja Exports by visiting our risks dashboard for free on our platform here.

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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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