It’s hard to get excited after looking at the recent performance of Adani Total Gas (NSE: ATGL ), which saw its shares down 3.2% in the past week. However, a closer look at its robust financials might make you think again. Given that fundamentals tend to drive long-term market performance, the company is worth a look. Specifically, we decided to examine the ROE of Adani Total Gas in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate a return on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability in relation to shareholder’s equity.
Our analysis shows this ATGL is potentially overrated!
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 for Adani Total Gas is:
19% = ₹5.1b ÷ ₹27b (Based on trailing twelve months to September 2022).
“Return” is the amount earned after tax in the last twelve months. This means that for every ₹1 worth of share capital, the company has generated ₹0.19 in profit.
What does ROE have to do with revenue growth?
So far we have learned that ROE is a measure of a company’s profitability. Now we need to estimate how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the company’s growth potential. All else being equal, companies that have both a higher return on equity and a higher earnings retention tend to be the ones that have a higher growth rate than companies that don’t. same characteristics.
Adani Total Gas profit growth and 19% ROE
To begin with, Adani Total Gas’s ROE looks acceptable. Additionally, the company’s ROE is similar to the industry average of 20%. This probably goes some way to explaining Adani Total Gas’ significant net income growth of 23% over the past five years, among other factors. We believe there may be other aspects that positively impact the company’s revenue growth. For example, it is possible that the company’s management has made some good strategic decisions or the company has a low payout ratio.
Then, when compared to the industry net income growth, we found that Adani Total Gas growth is quite high compared to the industry average growth of 19% over the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. That way, they’ll have an idea if the stock has headed for clear blue waters or if they’re in for muddy waters. If you’re wondering about Adani Total Gas’s valuation, check out this price-to-earnings ratio benchmark against its industry.
Is Adani Total Gas effectively using its retained earnings?
Adani Total Gas’s three-year average payout ratio to shareholders is 5.9%, which is quite low. This means that the company keeps 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business, as evidenced by the growth seen by the company.
Furthermore, Adani Total Gas is committed to continuing to share its profits with shareholders, which we infer from its long history of four years of dividend payouts.
Overall, we are quite satisfied with the performance of Adani Total Gas. Specifically, we like that the company reinvests a huge portion of its earnings at a high rate of return. This of course has caused the company to see a significant increase in its profits. If the company continues to grow its earnings in the same way, it could have a positive impact on its stock price, given how earnings per share affect stock prices over the long term. Not to forget, share price performance also depends on the potential risks a company may face. Therefore, it is important that investors are aware of the risks associated with the business. You can see the 3 risks we identified for Adani Total Gas by visiting our risk dashboard for free on our platform here.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an 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. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.