Is Torrent Pharmaceuticals Limited's (NSE:TORNTPHARM) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Torrent Pharmaceuticals' (NSE:TORNTPHARM) stock is up by a considerable 13% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Torrent Pharmaceuticals' ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Torrent Pharmaceuticals

How To Calculate Return On Equity?

Return on equity 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 Torrent Pharmaceuticals is:

22% = ₹15b ÷ ₹67b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.22 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Torrent Pharmaceuticals' Earnings Growth And 22% ROE

At first glance, Torrent Pharmaceuticals seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. This certainly adds some context to Torrent Pharmaceuticals' decent 12% net income growth seen over the past five years.

Next, on comparing Torrent Pharmaceuticals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Torrent Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Torrent Pharmaceuticals Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 58% (or a retention ratio of 42%) for Torrent Pharmaceuticals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Torrent Pharmaceuticals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 30% over the next three years. The fact that the company's ROE is expected to rise to 33% over the same period is explained by the drop in the payout ratio.

Summary

On the whole, we feel that Torrent Pharmaceuticals' performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.