Do Fundamentals Have Any Role To Play In Driving Torrent Pharmaceuticals Limited’s (NSE:TORNTPHARM) Stock Up Recently?

Torrent Pharmaceuticals (NSE:TORNTPHARM) shares have risen 10.0% in the last three months. We wonder if and what role the company's financials play a role in that price change, since a company's long-term fundamentals often dictate market outcomes. In this article we decided to focus on Torrente Pharmaceuticals ROE.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability index that measures the rate of return on the capital contributed by the company's 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 profit (from continuing operations) ÷ Shareholders' equity

So, based on the above formula, Torrent Pharmaceuticals' ROE is:

20% = 13 billion rupees ÷ 67 billion rupees (based on trailing twelve months to September 2023).

The 'return' is the profit of the last twelve months. Another way to think about this is that for every INR 1 worth of equity, the company was able to make INR 0.20 in 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth, which then gives us an idea about the company's growth potential. Generally speaking, all things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.

A Side by Side Comparison of Torrent Pharmaceuticals Earnings Growth and ROE of 20%

To begin with, Torrent Pharmaceuticals's ROE looks decent. Compared to the industry average ROE of 12%, the company's ROE seems quite remarkable. This certainly adds some context to Torrent Pharmaceuticals' decent 12% net income growth seen over the past five years.

We then compared Torrent Pharmaceuticals' net income growth with the industry and found that the company's growth figure is lower than the industry average growth rate of 16% in the same 5-year period, which is a little worrying.

NSEI:TORNTPHARM Past Earnings Growth December 11, 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine whether the stock is positioned for a bright or bleak future. 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 prospects. So you might want to check if Torrent Pharmaceuticals is trading on a high or low P/Ein relation to your industry.

Is Torrent Pharmaceuticals making efficient use of its profits?

The high three-year median payout ratio of 56% (or a 44% retention ratio) for Torrent Pharmaceuticals suggests that the company's growth was not really hindered even though it returned most of its revenue to its shareholders.

Furthermore, Torrent Pharmaceuticals is determined to continue sharing its profits with shareholders, as evident from its long history of paying dividends for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to fall to 31% over the next three years. As a result, the expected drop in Torrent Pharmaceuticals' payout ratio explains the expected increase in the company's future ROE to 28%, over the same period.

Conclusion

Overall, we think Torrent Pharmaceuticals certainly has some positive factors to consider. The company has grown its earnings moderately as mentioned above. Still, the high ROE could have been even more beneficial to investors if the company had reinvested more of its profits. As highlighted above, the current reinvestment rate appears to be quite low. That said, the latest forecasts from industry analysts reveal that the company's earnings are expected to accelerate. Are these analysts' expectations based on general industry expectations or the company's fundamentals? Click here to access our analyst forecasts page for the company.

Valuation is complex, but we are helping to simplify it.

Find out if Torrente Pharmaceuticals is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

See the free analysis

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 objectives or financial situation. Our goal is to provide you with focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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