Stock Analysis

Godrej Agrovet Limited's (NSE:GODREJAGRO) Stock Is Going Strong: Have Financials A Role To Play?

  •  Updated
NSEI:GODREJAGRO
Source: Shutterstock

Godrej Agrovet (NSE:GODREJAGRO) has had a great run on the share market with its stock up by a significant 13% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Godrej Agrovet'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Godrej Agrovet

How Is ROE Calculated?

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 Godrej Agrovet is:

14% = ₹3.4b ÷ ₹25b (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.14.

Why Is ROE Important For 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 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.

Godrej Agrovet's Earnings Growth And 14% ROE

At first glance, Godrej Agrovet's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 11% which we definitely can't overlook. This probably goes some way in explaining Godrej Agrovet's moderate 9.6% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Godrej Agrovet's reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.

past-earnings-growth
NSEI:GODREJAGRO Past Earnings Growth April 28th 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Godrej Agrovet is trading on a high P/E or a low P/E, relative to its industry.

Is Godrej Agrovet Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Godrej Agrovet is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Godrej Agrovet is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 28% of its profits over the next three years. Still, forecasts suggest that Godrej Agrovet's future ROE will rise to 20% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Godrej Agrovet has some positive attributes. 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Godrej Agrovet is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

About NSEI:GODREJAGRO

Godrej Agrovet

Godrej Agrovet Limited, an agri-business company, provides products and services that enhance crop and livestock yields in India and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth5
Past Performance2
Financial Health4
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

High growth potential with adequate balance sheet and pays a dividend.