Torrent Pharmaceuticals (NSE: TORNTPHARM) has had a great run in the stock market with its shares increasing significantly by 11% in the last three months. Since stock prices are generally in line with a company's long-term financial performance, we decided to study its financial metrics more closely to see if they had a stake in the recent price movement. In this article, we decided to focus on Torrent Pharmaceuticals' ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it received from its shareholders. In other words, it reveals the success of the company in turning shareholders' investments into profits.
Check out our latest Torrent Pharmaceuticals review
How is return on equity calculated?
ROE can be calculated using the formula:
Return on equity = Net profit (from continuing operations) รท Stockholders' equity
So based on the formula above, the ROE for Torrent Pharmaceuticals is:
22% = โน 13b รท โน 58b (based on the last twelve months to June 2021).
The 'return' is the income the company earned during the last year. That means that for every $ 1 value of shareholders' equity, the company generated $ 0.22 in profit.
Why is ROE important to earnings growth?
We have already established that ROE serves as an efficient profit-generating indicator for a company's future profits. Based on the amount of your earnings that the company decides to reinvest or "retain", we can assess the future ability of the company to generate profits. Assuming everything else is unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.
Torrent Pharmaceuticals earnings growth and 22% ROE
At first glance, Torrent Pharmaceuticals appears to have a decent ROE. When compared to the industry average ROE of 15%, the company's ROE seems quite remarkable. Despite this, Torrent Pharmaceuticals' five-year net income growth was quite low averaging just 3.5%. That's a bit unexpected for a company that has such a high rate of return. This scenario is likely to occur when a company pays a large portion of its earnings as dividends or faces competitive pressures.
Next, when comparing to industry net income growth, we find that Torrent Pharmaceuticals' reported growth was less than industry growth of 19% in the same period, which is not something we like to see.
Earning growth is an important factor in equity valuation. It is important for an investor to know if the market has priced in the growth (or decline) of the company's expected earnings. Doing so will help them establish whether the future of the stock looks promising or ominous. For questions about Torrent Pharmaceuticals valuation, see this indicator of your price-earnings ratio, compared to your industry.
Is Torrent Pharmaceuticals making efficient use of its benefits?
While Torrent Pharmaceuticals has a decent three-year median pay rate of 42% (or a 58% retention rate), it has seen very little profit growth. Therefore, there could be other factors at play here that could potentially hamper growth. For example, the company has faced some obstacles.
Additionally, Torrent Pharmaceuticals has been paying dividends for a period of at least ten years, suggesting that maintaining dividend payments is much more important to management, even if it comes at the cost of business growth. Studying the latest analyst consensus data, we found that the company's future pay ratio is expected to drop to 30% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.
Summary
Overall, we believe that Torrent Pharmaceuticals certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth even despite a high ROE and high reinvestment rate. We believe that there may be some external factors that could have a negative impact on the business. This being the case, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To learn more about the company's future earnings growth forecasts, take a look at this free report on analyst forecasts for the company for more information.
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This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, and it does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused 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 listed stocks.
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