Gujarat Pipavav Port Limited (NSE:GPPL) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that Gujarat Pipavav Port's (NSE:GPPL) stock increased significantly by 18% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Gujarat Pipavav Port's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out 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:

13% = ₹2.9b ÷ ₹22b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.13 in profit.

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 13% ROE

At first glance, Gujarat Pipavav Port's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 3.1%, is definitely interesting. Still, Gujarat Pipavav Port's net income growth of 2.8% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

We then compared Gujarat Pipavav Port's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.1% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Gujarat Pipavav Port's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gujarat Pipavav Port Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 80% (or a retention ratio of 20%), most of Gujarat Pipavav Port's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Gujarat Pipavav Port has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 83% of its profits over the next three years. Accordingly, forecasts suggest that Gujarat Pipavav Port's future ROE will be 13% which is again, similar to the current ROE.

Summary

On the whole, we feel that the performance shown by Gujarat Pipavav Port can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. 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.
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