Jagsonpal Pharmaceuticals Limited's (NSE:JAGSNPHARM) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Jagsonpal Pharmaceuticals' (NSE:JAGSNPHARM) stock increased significantly by 89% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Jagsonpal 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 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 Jagsonpal Pharmaceuticals

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 Jagsonpal Pharmaceuticals is:

8.8% = ₹104m ÷ ₹1.2b (Based on the trailing twelve months to September 2020).

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 ₹0.09.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Jagsonpal Pharmaceuticals' Earnings Growth And 8.8% ROE

As you can see, Jagsonpal Pharmaceuticals' ROE looks pretty weak. Even compared to the average industry ROE of 14%, the company's ROE is quite dismal. However, the moderate 16% net income growth seen by Jagsonpal Pharmaceuticals over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Jagsonpal Pharmaceuticals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% in the same 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Jagsonpal Pharmaceuticals fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jagsonpal Pharmaceuticals Making Efficient Use Of Its Profits?

In Jagsonpal Pharmaceuticals' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 3.4% (or a retention ratio of 97%), which suggests that the company is investing most of its profits to grow its business.

Besides, Jagsonpal Pharmaceuticals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Jagsonpal Pharmaceuticals certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Jagsonpal 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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