Do Its Financials Have Any Role To Play In Driving Gujarat Pipavav Port Limited's (NSE:GPPL) Stock Up Recently?

Gujarat Pipavav Port (NSE:GPPL) has had a great run on the share market with its stock up by a significant 8.1% over the last week. 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. Particularly, we will be paying attention to Gujarat Pipavav Port's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Gujarat Pipavav Port is:

15% = ₹3.5b ÷ ₹23b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.15 in profit.

View our latest analysis for Gujarat Pipavav Port

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Gujarat Pipavav Port's Earnings Growth And 15% ROE

To start with, Gujarat Pipavav Port's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 17%. Consequently, this likely laid the ground for the decent growth of 7.8% seen over the past five years by Gujarat Pipavav Port.

Next, on comparing with the industry net income growth, we found that Gujarat Pipavav Port's reported growth was lower than the industry growth of 32% over the last few years, which is not something we like to see.

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. 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 Efficiently Re-investing Its Profits?

Gujarat Pipavav Port has a significant three-year median payout ratio of 98%, meaning that it is left with only 2.0% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Gujarat Pipavav Port has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 80%. Regardless, the future ROE for Gujarat Pipavav Port is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Gujarat Pipavav Port has some positive aspects to its business. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.