Godfrey Phillips India Limited (NSE:GODFRYPHLP) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 9.3% over the past week, it is easy to disregard Godfrey Phillips India (NSE:GODFRYPHLP). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Godfrey Phillips India's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Godfrey Phillips India

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 Godfrey Phillips India is:

21% = ₹10b ÷ ₹47b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.21 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Godfrey Phillips India's Earnings Growth And 21% ROE

To start with, Godfrey Phillips India's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 14%. This probably laid the ground for Godfrey Phillips India's significant 24% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Godfrey Phillips India's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.8% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Godfrey Phillips India's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Godfrey Phillips India Using Its Retained Earnings Effectively?

Godfrey Phillips India's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Godfrey Phillips India is reinvesting its earnings efficiently.

Besides, Godfrey Phillips India has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. As a result, Godfrey Phillips India's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Summary

In total, we are pretty happy with Godfrey Phillips India's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.