Gallantt Ispat Limited's (NSE:GALLANTT) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Gallantt Ispat (NSE:GALLANTT) has had a rough month with its share price down 13%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Gallantt Ispat's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Gallantt Ispat

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 Gallantt Ispat is:

13% = ₹3.2b ÷ ₹25b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.13 in profit.

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.

A Side By Side comparison of Gallantt Ispat's Earnings Growth And 13% ROE

At first glance, Gallantt Ispat's ROE doesn't look very promising. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Gallantt Ispat's net income grew significantly at a rate of 37% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Gallantt Ispat's growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Gallantt Ispat is trading on a high P/E or a low P/E, relative to its industry.

Is Gallantt Ispat Efficiently Re-investing Its Profits?

Gallantt Ispat's three-year median payout ratio to shareholders is 11%, which is quite low. This implies that the company is retaining 89% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Gallantt Ispat is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

Overall, we feel that Gallantt Ispat certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Gallantt Ispat.

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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.