Is GHCL Limited’s (NSE:GHCL) recent stock performance a reflection of its financial health?

Most readers will already be aware that GHCL (NSE:GHCL) shares have risen 35% over the past three months. Since the market usually pays for a company’s long-term fundamentals, we decided to examine the company’s key performance indicators to see if they could influence the market. In particular, we will be paying attention to GHCL’s return on equity today.

Return on equity (ROE) is an important metric used to assess how efficiently a company’s management is using the company’s capital. Simply put, it is used to evaluate a company’s profitability relative to its equity.

Check out our latest analysis for GHCL

How do you calculate return on equity?

ROE can be calculated using the following formula:

Return on equity = Net profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for GHCL is:

17% = ₹5.2 billion ÷ ₹30 billion (based on the trailing twelve months ending June 2024).

The “return” is the profit for the last twelve months. This means that for every rupee of equity, the company earned 0.17 rupees in profit.

Why is return on equity (ROE) important for earnings growth?

So far, we have learned that return on equity is a measure of a company’s profitability. Based on how much of its profits the company reinvests or “retains,” we can then judge a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics.

A comparison of GHCL’s earnings growth and return on equity of 17%

First of all, GHCL’s return on equity looks acceptable. Especially when compared to the industry average of 11%, the company’s return on equity looks quite impressive. This gives some context to GHCL’s exceptional net income growth of 24% over the past five years. We believe there could be other aspects as well that are positively influencing the company’s earnings growth. For example, the company has a low payout ratio or is managed efficiently.

Next, while comparing with the industry net income growth, we found that GHCL’s growth is quite high compared to the average industry growth of 15% during the same period, which is great.

The basis for valuing a company depends heavily on its earnings growth. Next, investors need to determine whether the expected earnings growth, or lack thereof, is already factored into the stock price. This will help them get an idea of ​​whether the stock is heading for clear waters or whether it is drifting into murky waters. What is GHCL worth today? The intrinsic value infographic in our free research report helps visualize whether GHCL is currently mispriced by the market.

Does GHCL use its profits efficiently?

GHCL’s three-year median payout ratio to shareholders is 15%, which is quite low. This means that the company retains 85% of its earnings. So, it looks like GHCL is heavily reinvesting its earnings to grow its business, which is reflected in its earnings growth.

In addition, GHCL has been paying dividends for at least ten years, which shows that the company is committed to returning profits to its shareholders.

Summary

Overall, we think that GHCL’s performance has been quite good. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to significant earnings growth for the company. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. For more information on the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.