Is strong financial data behind the recent rally in Gokul Agro Resources Limited (NSE: GOKULAGRO) shares?
The stock of Gokul Agro Resources (NSE: GOKULAGRO) has increased 77% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In particular, we will pay particular attention to the ROE of Gokul Agro Resources today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for Gokul Agro Resources
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Gokul Agro Resources is:
18% = ₹ 671m ÷ ₹ 3.8b (Based on the last twelve months up to September 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every 1 in equity, the company generated 0.18 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Gokul Agro Resources profit growth and 18% ROE
For starters, Gokul Agro Resources’ ROE seems acceptable. Compared to the industry average ROE of 12%, the company’s ROE looks quite remarkable. This certainly adds context to Gokul Agro Resources’ exceptional net income growth of 32% observed over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, the business has a low payout ratio or is managed efficiently.
We then compared the net income growth of Gokul Agro Resources with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 16%. during the same period.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. Is Gokul Agro Resources just valued over other companies? These 3 evaluation measures could help you decide.
Is Gokul Agro Resources Efficiently Using Its Retained Earnings?
Gokul Agro Resources does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the company. This certainly contributes to the high number of profit growth we discussed above.
Overall, we are quite satisfied with the performance of Gokul Agro Resources. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that trading risk is also one of the factors that affect the price of the stock. So this is also an important area that investors should pay attention to before making a decision on a business. You can see the 3 risks we have identified for Gokul Agro Resources by visiting our risk dashboard for free on our platform here.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.