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

Procter & Gamble Hygiene and Health Care (NSE:PGHH) has had a great run on the share market with its stock up by a significant 6.9% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Procter & Gamble Hygiene and Health Care's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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

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 Procter & Gamble Hygiene and Health Care is:

43% = ₹4.2b ÷ ₹10.0b (Based on the trailing twelve months to March 2020).

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 ₹0.43 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learnt that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Procter & Gamble Hygiene and Health Care's Earnings Growth And 43% ROE

To begin with, Procter & Gamble Hygiene and Health Care has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. Given the circumstances, we can't help but wonder why Procter & Gamble Hygiene and Health Care saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital

We then compared Procter & Gamble Hygiene and Health Care's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same period, which is a bit concerning.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Procter & Gamble Hygiene and Health Care's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Procter & Gamble Hygiene and Health Care Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 37% (or a retention ratio of 63%), Procter & Gamble Hygiene and Health Care hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Procter & Gamble Hygiene and Health Care has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Procter & Gamble Hygiene and Health Care has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Up till now, we've only made a short study of the company's growth data. To gain further insights into Procter & Gamble Hygiene and Health Care's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.
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