Is Adani Total Gas Limited's (NSE:ATGL) Stock's Recent Performance A Reflection Of Its Financial Health?

Most readers would already know that Adani Total Gas' (NSE:ATGL) stock increased by 8.2% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Adani Total Gas' ROE.

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 Is ROE Calculated?

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 Adani Total Gas is:

16% = ₹6.5b ÷ ₹42b (Based on the trailing twelve months to March 2025).

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 ₹0.16 in profit.

See our latest analysis for Adani Total Gas

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Adani Total Gas' Earnings Growth And 16% ROE

At first glance, Adani Total Gas seems to have a decent ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. This probably goes some way in explaining Adani Total Gas' moderate 9.5% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Adani Total Gas' growth is quite high when compared to the industry average growth of 6.9% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Adani Total Gas is trading on a high P/E or a low P/E, relative to its industry.

Is Adani Total Gas Making Efficient Use Of Its Profits?

Adani Total Gas has a low three-year median payout ratio of 4.6%, meaning that the company retains the remaining 95% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Adani Total Gas is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

On the whole, we feel that Adani Total Gas' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.

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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.