Gujarat Narmada Valley Fertilizers & Chemicals Limited's (NSE:GNFC) Stock Is Going Strong: Have Financials A Role To Play?

Gujarat Narmada Valley Fertilizers & Chemicals' (NSE:GNFC) stock is up by a considerable 13% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Gujarat Narmada Valley Fertilizers & Chemicals' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Gujarat Narmada Valley Fertilizers & Chemicals

How Do You Calculate Return On Equity?

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 Gujarat Narmada Valley Fertilizers & Chemicals is:

8.0% = ₹7.0b ÷ ₹88b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Gujarat Narmada Valley Fertilizers & Chemicals' Earnings Growth And 8.0% ROE

It is quite clear that Gujarat Narmada Valley Fertilizers & Chemicals' ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. In spite of this, Gujarat Narmada Valley Fertilizers & Chemicals was able to grow its net income considerably, at a rate of 22% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Gujarat Narmada Valley Fertilizers & Chemicals' 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 17%.

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 Gujarat Narmada Valley Fertilizers & Chemicals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gujarat Narmada Valley Fertilizers & Chemicals Using Its Retained Earnings Effectively?

Gujarat Narmada Valley Fertilizers & Chemicals' three-year median payout ratio to shareholders is 18%, which is quite low. This implies that the company is retaining 82% 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.

Additionally, Gujarat Narmada Valley Fertilizers & Chemicals 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.

Summary

On the whole, we do feel that Gujarat Narmada Valley Fertilizers & Chemicals has some positive attributes. 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 would have the 2 risks we have identified for Gujarat Narmada Valley Fertilizers & Chemicals.

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

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.