Declining Stock and Decent Financials: Is The Market Wrong About Godfrey Phillips India Limited (NSE:GODFRYPHLP)?

By
Simply Wall St
Published
May 01, 2021
NSEI:GODFRYPHLP

It is hard to get excited after looking at Godfrey Phillips India's (NSE:GODFRYPHLP) recent performance, when its stock has declined 7.1% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Godfrey Phillips India's 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.

Check out our latest analysis for Godfrey Phillips India

How Do You Calculate Return On Equity?

Return on equity 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 Godfrey Phillips India is:

14% = ₹3.2b ÷ ₹24b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.14 in profit.

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. 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.

Godfrey Phillips India's Earnings Growth And 14% ROE

At first glance, Godfrey Phillips India's ROE doesn't look very promising. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 18% net income growth seen by Godfrey Phillips India over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Godfrey Phillips India's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% in the same period.

past-earnings-growth
NSEI:GODFRYPHLP Past Earnings Growth May 2nd 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Godfrey Phillips India fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Godfrey Phillips India Using Its Retained Earnings Effectively?

Godfrey Phillips India's three-year median payout ratio to shareholders is 23% (implying that it retains 77% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Godfrey Phillips India 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

On the whole, we do feel that Godfrey Phillips India has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Godfrey Phillips India 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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