Has Galaxy Surfactants Limited's (NSE:GALAXYSURF) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Galaxy Surfactants (NSE:GALAXYSURF) has had a great run on the share market with its stock up by a significant 28% 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 Galaxy Surfactants' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Galaxy Surfactants

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Galaxy Surfactants is:

14% = ₹3.0b ÷ ₹22b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Galaxy Surfactants' Earnings Growth And 14% ROE

At first glance, Galaxy Surfactants' ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 10% which we definitely can't overlook. This certainly adds some context to Galaxy Surfactants' moderate 11% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Galaxy Surfactants' reported growth was lower than the industry growth of 16% over the last few years, which is not something we like 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Galaxy Surfactants fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Galaxy Surfactants Using Its Retained Earnings Effectively?

Galaxy Surfactants' three-year median payout ratio to shareholders is 13% (implying that it retains 87% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Galaxy Surfactants has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 20% over the next three years. Still, forecasts suggest that Galaxy Surfactants' future ROE will rise to 17% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we do feel that Galaxy Surfactants has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

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