Is the recent performance of Petronet LNG Limited (NSE:PETRONET) shares related to its strong fundamentals?

0

Petronet LNG (NSE:PETRONET) stock is up 12% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of Petronet LNG in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Petronet LNG

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Petronet LNG is:

25% = ₹34 billion ÷ ₹137 billion (based on the last twelve months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every ₹ of equity, the company generated ₹0.25 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Profit growth and ROE of 25% of Petronet LNG

For starters, Petronet LNG appears to have a respectable ROE. Especially when compared to the industry average of 17%, the company’s ROE looks pretty impressive. Probably because of this, Petronet LNG has been able to see a decent 12% growth over the past five years.

Then, comparing with the industry net income growth, we found that Petronet LNG’s growth is quite high compared to the industry average growth of 7.8% over the same period, which which is great to see.

NSEI: PETRONET Past Earnings Growth July 16, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Petronet LNG is trading on a high P/E or a low P/E, relative to its industry.

Is Petronet LNG using its profits efficiently?

Petronet LNG’s three-year median payout ratio to shareholders is 25% (implying it keeps 75% of its revenue), which is pretty low, so it looks like management is massively reinvesting earnings to grow his activity.

In addition, Petronet LNG has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 73% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.

Summary

Overall, we believe Petronet LNG’s performance has been quite good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Share.

About Author

Comments are closed.