Are Procter & Gamble Hygiene and Health Care Limited's (NSE:PGHH) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 13% over the past three months, it is easy to disregard Procter & Gamble Hygiene and Health Care (NSE:PGHH). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Procter & Gamble Hygiene and Health Care's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Procter & Gamble Hygiene and Health Care

How Is ROE Calculated?

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 Procter & Gamble Hygiene and Health Care is:

76% = ₹7.2b ÷ ₹9.5b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.76.

Why Is ROE Important For 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 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.

Procter & Gamble Hygiene and Health Care's Earnings Growth And 76% ROE

Firstly, we acknowledge that Procter & Gamble Hygiene and Health Care has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. This probably laid the groundwork for Procter & Gamble Hygiene and Health Care's moderate 7.8% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Procter & Gamble Hygiene and Health Care's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Procter & Gamble Hygiene and Health Care fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Procter & Gamble Hygiene and Health Care Using Its Retained Earnings Effectively?

While Procter & Gamble Hygiene and Health Care has a three-year median payout ratio of 91% (which means it retains 8.5% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Procter & Gamble Hygiene and Health Care 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 84%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 86%.

Conclusion

On the whole, we do feel that Procter & Gamble Hygiene and Health Care has some positive attributes. Its earnings have grown respectably as we saw earlier, probably due to its high returns. However, it does reinvest little to almost none of its profits, so we wonder what effect this could have on its future growth prospects. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.