Is Garware Hi-Tech Films Limited's (NSE:GRWRHITECH) recent share price performance influenced in any way by the company's fundamentals?

Many of our readers will already be aware that Garware Hi-Tech Films' (NSE:GRWRHITECH) share price has risen significantly by 20% over the past month. Since a company's long term fundamentals often drive market outcomes, we're interested to know if and how the company's financial position has influenced this price movement. In particular, we'll be looking at Garware Hi-Tech Films' ROE today.

ROE or return on equity is a tool that helps assess how effectively a company can generate profits on the investment it received from its shareholders. In simple terms, it measures a company's profitability relative to shareholder's capital.

View our latest analysis for Garware Hi-Tech Films

How is ROE calculated?

Return on equity can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) / Shareholders' Equity

So, based on the above formula, the ROE for Garware Hi-Tech Films is:

9.9% = ₹20 Billion ÷ ₹20 Billion (Based on the trailing twelve months to March 2024).

The “return” refers to annual profit, i.e. for every rupee invested by a shareholder, the company will generate a profit of rupees 0.10.

What is the relationship between ROE and profit growth?

It's already clear that ROE serves as an efficient predictor of a company's future earnings. Based on how much of its profits a company chooses to reinvest or “retain”, we can evaluate a company's future profit-generating ability. Generally, all else being equal, companies with higher return on equity and profit retention tend to have higher growth rates than companies that don't have these attributes.

Garware Hi-Tech Films Revenue Growth and ROE of 9.9%

At first glance, Garware Hi-Tech Films' ROE doesn't look very promising. However, we don't write the company off completely, as its ROE is in line with the industry average of 10%. Meanwhile, Garware Hi-Tech Films has reported modest net income growth of 19% over the past five years. Given that the ROE is not particularly high, there could be other factors affecting the company's growth. For example, the company's management may have made some good strategic decisions, or the company's dividend payout ratio may be low.

Secondly, when we compare it with the industry's net income growth, we find that Garware Hi-Tech Films' growth is very high and impressive compared to the average industry growth of 16% during the same period.

The yardstick for valuing a company is heavily tied to its earnings growth rate. Investors need to see if the expected growth or decline in earnings (in either case) is priced into the share price. Doing so helps them gauge whether the stock's future is promising or ominous. If you're in doubt about Garware Hi-Tech Films' valuation, check out this metric of its price-to-earnings ratio compared to its industry.

Is Garware Hi-Tech Films reinvesting its profits efficiently?

In Garware Hi-Tech Films's case, the company's impressive earnings growth can probably be explained by its low three-year median dividend payout ratio of 14% (or a retention ratio of 86%), which suggests that the company is investing most of its profits in growing its business.

Moreover, Garware Hi-Tech Films is determined to continue sharing profits with shareholders, as can be inferred from its long history of seven years of dividend payments.

Conclusion

Overall, Garware Hi-Tech Films' business appears to have some positive aspects. Despite low profitability, the company has recorded impressive earnings growth as a result of reinvesting heavily in the business. We don't want to write the company off entirely, but we'll try to ascertain the risks to the business in order to make a more informed decision about it. To see the 2 risks we've identified for Garware Hi-Tech Films, visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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