Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 16% over the past three months, it is easy to disregard Laboratorios Farmaceuticos Rovi (BME:ROVI). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Laboratorios Farmaceuticos Rovi's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Laboratorios Farmaceuticos Rovi

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Laboratorios Farmaceuticos Rovi is:

31% = €148m ÷ €483m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.31.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Laboratorios Farmaceuticos Rovi's Earnings Growth And 31% ROE

To begin with, Laboratorios Farmaceuticos Rovi has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. So, the substantial 30% net income growth seen by Laboratorios Farmaceuticos Rovi over the past five years isn't overly surprising.

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 9.3% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Making Efficient Use Of Its Profits?

The three-year median payout ratio for Laboratorios Farmaceuticos Rovi is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Laboratorios Farmaceuticos Rovi is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Accordingly, forecasts suggest that Laboratorios Farmaceuticos Rovi's future ROE will be 29% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.