With its stock down 16% over the past three months, it is easy to disregard Galaxy Surfactants (NSE:GALAXYSURF). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Galaxy Surfactants’ ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Galaxy Surfactants
How Is ROE Calculated?
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 Galaxy Surfactants is:
15% = ₹3.1b ÷ ₹20b (Based on the trailing twelve months to December 2023).
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 ₹0.15.
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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Galaxy Surfactants’ Earnings Growth And 15% ROE
To begin with, Galaxy Surfactants seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 12%. This certainly adds some context to Galaxy Surfactants’ decent 13% net income growth seen over the past five years.
As a next step, we compared Galaxy Surfactants’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 17% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. What is GALAXYSURF worth today? The intrinsic value infographic in our free research report helps visualize whether GALAXYSURF is currently mispriced by the market.
Is Galaxy Surfactants Making Efficient Use Of Its Profits?
Galaxy Surfactants has a low three-year median payout ratio of 12%, meaning that the company retains the remaining 88% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Galaxy Surfactants has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 17% over the next three years. Regardless, the future ROE for Galaxy Surfactants is speculated to rise to 20% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
Summary
On the whole, we feel that Galaxy Surfactants’ performance has been quite good. 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 respectable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
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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.
