Has Procter & Gamble Hygiene and Health Care Limited (NSE:PGHH) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that Procter & Gamble Hygiene and Health Care's (NSE:PGHH) stock increased by 2.9% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, 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 Procter & Gamble Hygiene and Health Care's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

How To Calculate Return On Equity?

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 Procter & Gamble Hygiene and Health Care is:

64% = ₹5.7b ÷ ₹8.9b (Based on the trailing twelve months to March 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.64 in profit.

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. 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. 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 64% ROE

First thing first, we like that Procter & Gamble Hygiene and Health Care has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. This probably laid the groundwork for Procter & Gamble Hygiene and Health Care's moderate 9.3% net income growth seen over the past five years.

As a next step, we compared Procter & Gamble Hygiene and Health Care's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.3%.

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. 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?

The high three-year median payout ratio of 90% (or a retention ratio of 9.8%) for Procter & Gamble Hygiene and Health Care suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Procter & Gamble Hygiene and Health Care has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Procter & Gamble Hygiene and Health Care has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Procter & Gamble Hygiene and Health Care's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.