Is Gujarat Ambuja Exports Limited's (NSE:GAEL) Latest Stock Performance A Reflection Of Its Financial Health?

Gujarat Ambuja Exports' (NSE:GAEL) stock is up by a considerable 25% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Gujarat Ambuja Exports' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Gujarat Ambuja Exports

How Do You 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:

15% = ₹2.2b ÷ ₹14b (Based on the trailing twelve months to September 2020).

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 ₹0.15 in profit.

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. 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.

Gujarat Ambuja Exports' Earnings Growth And 15% ROE

To start with, Gujarat Ambuja Exports' ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, Gujarat Ambuja Exports was able to see a decent growth of 7.3% over the last five years.

Next, on comparing with the industry net income growth, we found that Gujarat Ambuja Exports' reported growth was lower than the industry growth of 19% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Gujarat Ambuja Exports fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gujarat Ambuja Exports Using Its Retained Earnings Effectively?

In Gujarat Ambuja Exports' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 5.8% (or a retention ratio of 94%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Gujarat Ambuja Exports has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased 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.

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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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