Is Gujarat Sidhee Cement Limited's (NSE:GSCLCEMENT) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
April 12, 2022
NSEI:GSCLCEMENT
Source: Shutterstock

Gujarat Sidhee Cement's (NSE:GSCLCEMENT) stock is up by a considerable 20% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, 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 Gujarat Sidhee Cement's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Gujarat Sidhee Cement

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 Gujarat Sidhee Cement is:

7.4% = ₹377m ÷ ₹5.1b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.07.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Gujarat Sidhee Cement's Earnings Growth And 7.4% ROE

As you can see, Gujarat Sidhee Cement's ROE looks pretty weak. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. In spite of this, Gujarat Sidhee Cement was able to grow its net income considerably, at a rate of 35% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Gujarat Sidhee Cement's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.

past-earnings-growth
NSEI:GSCLCEMENT Past Earnings Growth April 12th 2022

Earnings growth is a huge factor in stock valuation. 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 Gujarat Sidhee Cement's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gujarat Sidhee Cement Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we feel that Gujarat Sidhee Cement 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. To know the 1 risk we have identified for Gujarat Sidhee Cement visit our risks dashboard for free.

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