Biofil Chemicals and Pharmaceuticals Limited's (NSE:BIOFILCHEM) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Biofil Chemicals and Pharmaceuticals (NSE:BIOFILCHEM) has had a great run on the share market with its stock up by a significant 221% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Biofil Chemicals and Pharmaceuticals' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Biofil Chemicals and Pharmaceuticals

How Is ROE Calculated?

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 Biofil Chemicals and Pharmaceuticals is:

9.5% = ₹15m ÷ ₹160m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.09 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Biofil Chemicals and Pharmaceuticals' Earnings Growth And 9.5% ROE

When you first look at it, Biofil Chemicals and Pharmaceuticals' ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 14% either. Thus, the low net income growth of 3.7% seen by Biofil Chemicals and Pharmaceuticals over the past five years could probably be the result of the low ROE.

As a next step, we compared Biofil Chemicals and Pharmaceuticals' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Biofil Chemicals and Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.

Is Biofil Chemicals and Pharmaceuticals Efficiently Re-investing Its Profits?

Summary

On the whole, we feel that the performance shown by Biofil Chemicals and Pharmaceuticals can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Biofil Chemicals and Pharmaceuticals by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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