Declining Stock and Decent Financials: Is The Market Wrong About Gujarat Pipavav Port Limited (NSE:GPPL)?

Gujarat Pipavav Port (NSE:GPPL) has had a rough three months with its share price down 8.7%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Gujarat Pipavav Port's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Gujarat Pipavav Port

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Gujarat Pipavav Port is:

17% = ₹3.8b ÷ ₹23b (Based on the trailing twelve months to June 2024).

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 ₹0.17.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Gujarat Pipavav Port's Earnings Growth And 17% ROE

To begin with, Gujarat Pipavav Port seems to have a respectable ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This certainly adds some context to Gujarat Pipavav Port's moderate 6.6% net income growth seen over the past five years.

As a next step, we compared Gujarat Pipavav Port'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 34% in the same period.

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. 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 Gujarat Pipavav Port is trading on a high P/E or a low P/E, relative to its industry.

Is Gujarat Pipavav Port Making Efficient Use Of Its Profits?

While Gujarat Pipavav Port has a three-year median payout ratio of 95% (which means it retains 5.2% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Gujarat Pipavav Port is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 82% of its profits over the next three years. However, Gujarat Pipavav Port's ROE is predicted to rise to 22% despite there being no anticipated change in its payout ratio.

Conclusion

In total, it does look like Gujarat Pipavav Port has some positive aspects to its business. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.