Is Laboratorios Farmaceuticos Rovi, S.A.'s (BME:ROVI) Recent Stock Performance Tethered To Its Strong Fundamentals?

Laboratorios Farmaceuticos Rovi's (BME:ROVI) stock is up by a considerable 27% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Laboratorios Farmaceuticos Rovi's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Laboratorios Farmaceuticos Rovi

How Do You 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 Laboratorios Farmaceuticos Rovi is:

36% = €197m ÷ €555m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.36.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Laboratorios Farmaceuticos Rovi's Earnings Growth And 36% ROE

Firstly, we acknowledge that Laboratorios Farmaceuticos Rovi has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Under the circumstances, Laboratorios Farmaceuticos Rovi's considerable five year net income growth of 44% was to be expected.

We then compared Laboratorios Farmaceuticos Rovi's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Laboratorios Farmaceuticos Rovi's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Laboratorios Farmaceuticos Rovi Using Its Retained Earnings Effectively?

Laboratorios Farmaceuticos Rovi has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. So it seems that Laboratorios Farmaceuticos Rovi is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Laboratorios Farmaceuticos Rovi has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. As a result, Laboratorios Farmaceuticos Rovi's ROE is not expected to change by much either, which we inferred from the analyst estimate of 29% for future ROE.

Summary

In total, we are pretty happy with Laboratorios Farmaceuticos Rovi's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.