Shares of Torrent Pharmaceuticals (NSE: TORNTPHARM) rose 3.5% over the past week. Given that stock prices generally follow long-term trading performance, we wonder if the company’s mixed financials could have a negative effect on its current price movement. In this article, we decided to focus on the ROE of Torrent Pharmaceuticals.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Torrent Pharmaceuticals
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Torrent Pharmaceuticals is:
13% = ₹7.8 billion ÷ ₹60 billion (based on the last twelve months to March 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every ₹1 worth of equity, the company was able to make a profit of ₹0.13.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. 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.
Torrent Pharmaceuticals earnings growth and 13% ROE
When you first look at it, Torrent Pharmaceuticals’ ROE doesn’t look that appealing. However, since the company’s ROE is similar to the industry average ROE of 13%, we can spare it some thought. On the other hand, Torrent Pharmaceuticals has recorded a moderate growth of 12% in net profit over the past five years. Considering the fact that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared Torrent Pharmaceuticals’ net income growth with the industry and found that the company’s growth figure is below the industry average growth rate of 22% over the same period, which which is a little worrying.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is Torrent Pharmaceuticals correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Is Torrent Pharmaceuticals Effectively Using Its Retained Earnings?
Torrent Pharmaceuticals has a significant three-year median payout ratio of 56%, meaning it only has 44% left to reinvest in its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, Torrent Pharmaceuticals is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 23% over the next three years. As a result, the expected decline in Torrent Pharmaceuticals’ distribution rate explains the company’s expected future ROE rise to 23% over the same period.
All in all, we’re a bit ambivalent about Torrent Pharmaceuticals’ performance. Although the company recorded decent earnings growth, we believe that the earnings growth number could have been even higher had the company reinvested more of its earnings at a higher rate of return. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.