Can Mixed Fundamentals Have A Negative Impact on EPL Limited (NSE:EPL) Current Share Price Momentum? – Simply Wall St - Techy Hunters

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Saturday, June 19, 2021

Can Mixed Fundamentals Have A Negative Impact on EPL Limited (NSE:EPL) Current Share Price Momentum? – Simply Wall St

EPL (NSE:EPL) has had a great run on the share market with its stock up by a significant 32% over the last three months. However, we decided to pay attention to the company’s fundamentals which don’t appear to give a clear sign about the company’s financial health. Particularly, we will be paying attention to EPL’s 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 EPL

How Do You Calculate Return On Equity?

Return on equity 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 EPL is:

14% = ₹2.4b ÷ ₹17b (Based on the trailing twelve months to March 2021).

The ‘return’ is the income the business earned over the last year. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.14 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

EPL’s Earnings Growth And 14% ROE

When you first look at it, EPL’s ROE doesn’t look that attractive. Although a closer study shows that the company’s ROE is higher than the industry average of 9.7% which we definitely can’t overlook. However, EPL’s five year net income growth was quite low averaging at only 4.9%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared EPL’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 6.9% in the same period.

past-earnings-growth
NSEI:EPL Past Earnings Growth June 19th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if EPL is trading on a high P/E or a low P/E, relative to its industry.

Is EPL Efficiently Re-investing Its Profits?

EPL has a three-year median payout ratio of 52% (implying that it keeps only 48% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Moreover, EPL has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 41% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 18%, over the same period.

Conclusion

In total, we’re a bit ambivalent about EPL’s performance. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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. 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.



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