Most readers would already be aware that G.M. Breweries' (NSE:GMBREW) stock increased significantly by 11% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on G.M. Breweries' ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 G.M. Breweries is:
12% = ₹525m ÷ ₹4.4b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.12 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
G.M. Breweries' Earnings Growth And 12% ROE
When you first look at it, G.M. Breweries' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.9% doesn't go unnoticed by us. This certainly adds some context to G.M. Breweries' moderate 5.2% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing with the industry net income growth, we found that G.M. Breweries' reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. 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 G.M. Breweries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is G.M. Breweries Making Efficient Use Of Its Profits?
G.M. Breweries' three-year median payout ratio to shareholders is 7.4% (implying that it retains 93% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Moreover, G.M. Breweries is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Overall, we feel that G.M. Breweries certainly does have some positive factors to consider. In particular, it's great to see that the company is investing heavily into its business and along with a moderate 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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