Biofil Chemicals and Pharmaceuticals Limited's (NSE:BIOFILCHEM) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Biofil Chemicals and Pharmaceuticals' (NSE:BIOFILCHEM) stock is up by a considerable 10% over the past week. 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.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Biofil Chemicals and Pharmaceuticals

How To 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 Biofil Chemicals and Pharmaceuticals is:

2.9% = ₹5.4m ÷ ₹184m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.03 in profit.

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. 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.

Biofil Chemicals and Pharmaceuticals' Earnings Growth And 2.9% ROE

It is quite clear that Biofil Chemicals and Pharmaceuticals' ROE is rather low. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. For this reason, Biofil Chemicals and Pharmaceuticals' five year net income decline of 21% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Biofil Chemicals and Pharmaceuticals' 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 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Biofil Chemicals and Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Biofil Chemicals and Pharmaceuticals Using Its Retained Earnings Effectively?

Biofil Chemicals and Pharmaceuticals doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

In total, we're a bit ambivalent about Biofil Chemicals and Pharmaceuticals' performance. 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. To know the 4 risks we have identified for Biofil Chemicals and Pharmaceuticals visit our risks dashboard for free.

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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.