RPG Life Sciences (NSE: RPGLIFE) shares are up a considerable 52% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In this article, we have decided to focus on the ROE of RPG Life Sciences.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for RPG Life Sciences
How is the ROE calculated?
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 RPG Life Sciences is:
21% = ₹ 445m ÷ ₹ 2.2b (Based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. Another way to think about this is that for every 1 value of equity, the company was able to make 0.21 profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
RPG Life Sciences profit growth and 21% ROE
For starters, RPG Life Sciences seems to have a respectable ROE. Compared to the industry’s average ROE of 17%, the company’s ROE looks quite remarkable. This likely laid the foundation for RPG Life Sciences’ significant 23% net profit growth seen over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. 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.
Then, comparing RPG Life Sciences’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 22% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of RPG Life Sciences, check out this gauge of its price / earnings ratio, compared to its sector.
Is RPG Life Sciences Efficiently Reinvesting Its Profits?
RPG Life Sciences’ three-year median payout ratio is less than 23%, which means it retains a higher percentage (77%) of its profits. So it looks like RPG Life Sciences is reinvesting its profits massively to grow its business, which is reflected in its profit growth.
Additionally, RPG Life Sciences has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders.
Overall, we think the performance of RPG Life Sciences is pretty good. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that stock price results also depend on the potential risks a company may face. It is therefore important that investors are aware of the risks inherent in the business. You can see the 2 risks we have identified for RPG Life Sciences by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St does not have any position in the mentioned stocks.
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