Gokul Refoils & Solvent Limited's (NSE:GOKUL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Most readers would already be aware that Gokul Refoils & Solvent's (NSE:GOKUL) stock increased significantly by 62% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Gokul Refoils & Solvent'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Gokul Refoils & Solvent

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 Gokul Refoils & Solvent is:

7.2% = ₹226m ÷ ₹3.1b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

What Has ROE Got To Do With 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. 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.

Gokul Refoils & Solvent's Earnings Growth And 7.2% ROE

It is quite clear that Gokul Refoils & Solvent's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Gokul Refoils & Solvent grew its net income at a significant rate of 29% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Gokul Refoils & Solvent's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Gokul Refoils & Solvent fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gokul Refoils & Solvent Making Efficient Use Of Its Profits?

The really high three-year median payout ratio of 133% for Gokul Refoils & Solvent suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 4 risks we have identified for Gokul Refoils & Solvent.

Additionally, Gokul Refoils & Solvent 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.

Conclusion

Overall, we have mixed feelings about Gokul Refoils & Solvent. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Up till now, we've only made a short study of the company's growth data. To gain further insights into Gokul Refoils & Solvent's past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you’re looking to trade Gokul Refoils & Solvent, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.