Does The Market Have A Low Tolerance For Aurobindo Pharma Limited's (NSE:AUROPHARMA) Mixed Fundamentals?

Aurobindo Pharma (NSE:AUROPHARMA) has had a rough month with its share price down 1.5%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Aurobindo Pharma's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Aurobindo Pharma is:

10% = ₹34b ÷ ₹326b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.10 in profit.

View our latest analysis for Aurobindo Pharma

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Aurobindo Pharma's Earnings Growth And 10% ROE

When you first look at it, Aurobindo Pharma's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 12%. But Aurobindo Pharma saw a five year net income decline of 6.9% over the past five years. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Aurobindo Pharma's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Aurobindo Pharma's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aurobindo Pharma Making Efficient Use Of Its Profits?

When we piece together Aurobindo Pharma's low three-year median payout ratio of 9.1% (where it is retaining 91% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This typically shouldn't be the case when a company is retaining most of its earnings. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Aurobindo Pharma has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.3% of its profits over the next three years. As a result, Aurobindo Pharma's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Summary

Overall, we have mixed feelings about Aurobindo Pharma. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.