Pearl Global Industries’ (NSE:PGIL) stock is up by a considerable 12% over the past week. However, we decided to pay attention to the company’s fundamentals which don’t appear to give a clear sign about the company’s financial health. In this article, we decided to focus on Pearl Global Industries’ ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Pearl Global Industries
How To Calculate Return On Equity?
ROE 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 Pearl Global Industries is:
11% = ₹701m ÷ ₹6.1b (Based on the trailing twelve months to March 2022).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.11 in profit.
Why Is ROE Important For Earnings 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 “retain”, we are then able to evaluate a company’s future ability to generate profits. 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 Pearl Global Industries’ Earnings Growth And 11% ROE
On the face of it, Pearl Global Industries’ ROE is not much to talk about. However, given that the company’s ROE is similar to the average industry ROE of 11%, we may spare it some thought. We can see that Pearl Global Industries has grown at a five year net income growth average rate of 3.7%, which is a bit on the lower side. Remember, the company’s ROE is not particularly great to begin with. So this could also be one of the reasons behind the company’s low growth in earnings.
Next, on comparing with the industry net income growth, we found that Pearl Global Industries’ reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Pearl Global Industries”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Pearl Global Industries Using Its Retained Earnings Effectively?
Pearl Global Industries has a low three-year median payout ratio of 13% (meaning, the company keeps the remaining 87% of profits) which means that the company is retaining more of its earnings. This should be reflected in its earnings growth number, but that’s not the case. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.
In addition, Pearl Global Industries has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
On the whole, we feel that the performance shown by Pearl Global Industries can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Pearl Global Industries 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. 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.