Is Bliss GVS Pharma Limited's (NSE:BLISSGVS) Recent Price Movement Underpinned By Its Weak Fundamentals?

By
Simply Wall St
Published
May 12, 2022
NSEI:BLISSGVS
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With its stock down 26% over the past three months, it is easy to disregard Bliss GVS Pharma (NSE:BLISSGVS). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Bliss GVS Pharma'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.

Check out our latest analysis for Bliss GVS Pharma

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 Bliss GVS Pharma is:

2.7% = ₹231m ÷ ₹8.5b (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.03.

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.

Bliss GVS Pharma's Earnings Growth And 2.7% ROE

It is quite clear that Bliss GVS Pharma's ROE is rather low. Even compared to the average industry ROE of 14%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 8.2% seen by Bliss GVS Pharma over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Bliss GVS Pharma's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 22% in the same period.

past-earnings-growth
NSEI:BLISSGVS Past Earnings Growth May 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Bliss GVS Pharma fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bliss GVS Pharma Using Its Retained Earnings Effectively?

Bliss GVS Pharma's low three-year median payout ratio of 7.9% (implying that it retains the remaining 92% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

In addition, Bliss GVS Pharma has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we're a bit ambivalent about Bliss GVS Pharma's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 6 risks we have identified for Bliss GVS Pharma by visiting our risks dashboard for free on our platform here.

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