Most readers would already be aware that G N A Axles’ (NSE:GNA) stock increased significantly by 50% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to G N A Axles’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Do You 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 G N A Axles is:
10% = ₹476m ÷ ₹4.6b (Based on the trailing twelve months to December 2020).
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 ₹0.10.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of G N A Axles’ Earnings Growth And 10% ROE
At first glance, G N A Axles’ ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 6.7% which we definitely can’t overlook. Consequently, this likely laid the ground for the decent growth of 7.3% seen over the past five years by G N A Axles. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Given that the industry shrunk its earnings at a rate of 0.9% in the same period, the net income growth of the company is quite impressive.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is GNA worth today? The intrinsic value infographic in our free research report helps visualize whether GNA is currently mispriced by the market.
Is G N A Axles Using Its Retained Earnings Effectively?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
Overall, we are quite pleased with G N A Axles’ performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for G N A Axles by visiting our risks dashboard for free on our platform here.
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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…