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Has Good Drinks Australia Ltd's (ASX:GDA) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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Simply Wall St
·3 min read
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Good Drinks Australia (ASX:GDA) has had a great run on the share market with its stock up by a significant 31% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Good Drinks Australia's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Good Drinks Australia

How To Calculate Return On Equity?

ROE 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 Good Drinks Australia is:

3.7% = AU$2.2m ÷ AU$59m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Good Drinks Australia's Earnings Growth And 3.7% ROE

As you can see, Good Drinks Australia's ROE looks pretty weak. Not just that, even compared to the industry average of 4.8%, the company's ROE is entirely unremarkable. Therefore, Good Drinks Australia's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Good Drinks Australia's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 0.5% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Good Drinks Australia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Good Drinks Australia Efficiently Re-investing Its Profits?

Summary

Overall, we feel that Good Drinks Australia certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. Up till now, we've only made a short study of the company's growth data. You can do your own research on Good Drinks Australia and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.