Are Strong Financial Prospects The Force That Is Driving The Momentum In NGL Fine-Chem Limited's NSE:NGLFINE) Stock?

NGL Fine-Chem (NSE:NGLFINE) has had a great run on the share market with its stock up by a significant 31% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to NGL Fine-Chem'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for NGL Fine-Chem

How To Calculate Return On Equity?

Return on equity 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 NGL Fine-Chem is:

16% = ₹380m ÷ ₹2.4b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.16.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

NGL Fine-Chem's Earnings Growth And 16% ROE

To start with, NGL Fine-Chem's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by NGL Fine-Chem.

As a next step, we compared NGL Fine-Chem's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is NGL Fine-Chem fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is NGL Fine-Chem Using Its Retained Earnings Effectively?

NGL Fine-Chem's three-year median payout ratio to shareholders is 2.7% (implying that it retains 97% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, NGL Fine-Chem has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that NGL Fine-Chem's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for NGL Fine-Chem visit our risks dashboard for free.

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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.