Gale Pacific Limited's (ASX:GAP) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Gale Pacific's (ASX:GAP) stock is up by a considerable 16% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Gale Pacific's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Gale Pacific
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Gale Pacific is:
7.8% = AU$7.6m ÷ AU$98m (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.08.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Gale Pacific's Earnings Growth And 7.8% ROE
When you first look at it, Gale Pacific's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.7%. Moreover, we are quite pleased to see that Gale Pacific's net income grew significantly at a rate of 33% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Gale Pacific's growth is quite high when compared to the industry average growth of 0.5% in the same period, which is great to see.
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. Is Gale Pacific fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Gale Pacific Making Efficient Use Of Its Profits?
Gale Pacific's significant three-year median payout ratio of 60% (where it is retaining only 40% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Additionally, Gale Pacific has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
On the whole, we do feel that Gale Pacific has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Gale Pacific and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
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