Indraprastha Gas Limited's (NSE:IGL) Stock Has Fared Decently: Is the Market Following Strong Financials?

Indraprastha Gas' (NSE:IGL) stock is up by 3.4% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Indraprastha Gas' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Indraprastha Gas is:

16% = ₹17b ÷ ₹106b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.16.

Check out our latest analysis for Indraprastha Gas

What Has ROE Got To Do With Earnings Growth?

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

Indraprastha Gas' Earnings Growth And 16% ROE

To begin with, Indraprastha Gas seems to have a respectable ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. This certainly adds some context to Indraprastha Gas' moderate 11% net income growth seen over the past five years.

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

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Indraprastha Gas is trading on a high P/E or a low P/E, relative to its industry.

Is Indraprastha Gas Efficiently Re-investing Its Profits?

Indraprastha Gas has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Indraprastha Gas has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Accordingly, forecasts suggest that Indraprastha Gas' future ROE will be 15% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Indraprastha Gas' performance. 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 sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.