Indraprastha Gas (NSE: IGL) had a tough week with its share price down 5.5%. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In this article, we have decided to focus on the ROE of Indraprastha Gas.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
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How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Indraprastha Gas is:
22% = ₹ 14b ÷ ₹ 63b (Based on the last twelve months up to June 2021).
The “return” is the profit of the last twelve months. This therefore means that for every 1 of the investments of its shareholder, the company generates a profit of 0.22.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Indraprastha Gas profit growth and 22% ROE
At first glance, Indraprastha Gas appears to have a decent ROE. Even compared to the industry average of 27%, the company’s ROE looks pretty decent. This certainly adds context to Indraprastha Gas’ moderate 16% net profit growth seen over the past five years.
We then performed a comparison between Indraprastha Gas net income growth with industry, which found that the growth of the company is similar to the industry average growth of 19% over the same period. .
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. Has the market taken into account IGL’s future prospects? You can find out in our latest Intrinsic Value infographic research report.
Is Indraprastha Gas Efficiently Using Its Retained Earnings?
Indraprastha Gas’ three-year median payout ratio to shareholders is 20% (implying that it keeps 80% of its revenue), which is lower, so it looks like management is heavily reinvesting profits to develop his activity.
In addition, Indraprastha Gas has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 15% over the next three years. Either way, the ROE is not expected to change much for the company despite the expected lower payout ratio.
Overall, we are quite happy with the performance of Indraprastha Gas. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. Looking at current analysts’ estimates, we found that analysts expect the company to continue its recent streak of growth. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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