Gokaldas Exports Down 11% Despite Solid Earnings Growth

Gokaldas Exports (NSE:GOKEX) has had a rough week with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Gokaldas Exports’ ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for Gokaldas Exports

How Do You Calculate Return On Equity?

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 Gokaldas Exports is:

23% = ₹1.8b ÷ ₹7.5b (Based on the trailing twelve months to September 2022).

The ‘return’ is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Gokaldas Exports’ Earnings Growth And 23% ROE

To start with, Gokaldas Exports’ ROE looks acceptable. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. Probably as a result of this, Gokaldas Exports was able to see an impressive net income growth of 58% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Gokaldas Exports’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 19% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Gokaldas Exports is trading on a high P/E or a low P/E, relative to its industry.

Is Gokaldas Exports Using Its Retained Earnings Effectively?

Given that Gokaldas Exports doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with Gokaldas Exports’ 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. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.