Do Fundamentals Have Any Role To Play In Driving Godrej Agrovet Limited's (NSE:GODREJAGRO) Stock Up Recently?

Godrej Agrovet's (NSE:GODREJAGRO) stock up by 4.2% over the past week. 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. Specifically, we decided to study Godrej Agrovet's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

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 Godrej Agrovet is:

15% = ₹4.0b ÷ ₹26b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.15 in profit.

Check out our latest analysis for Godrej Agrovet

What Is The Relationship Between ROE And 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 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.

Godrej Agrovet's Earnings Growth And 15% ROE

At first glance, Godrej Agrovet seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. Yet, Godrej Agrovet has posted measly growth of 4.8% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Godrej Agrovet's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Godrej Agrovet's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Godrej Agrovet Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 51% (that is, the company retains only 49% of its income) over the past three years for Godrej Agrovet suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Godrej Agrovet has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 30% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 23%, over the same period.

Summary

Overall, we feel that Godrej Agrovet certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.