Laurus Labs Limited (NSE:LAURUSLABS) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Most readers would already know that Laurus Labs' (NSE:LAURUSLABS) stock increased by 2.6% over the past week. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study Laurus Labs' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Laurus Labs

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Laurus Labs is:

3.6% = ₹1.5b ÷ ₹41b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.04 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Laurus Labs' Earnings Growth And 3.6% ROE

It is quite clear that Laurus Labs' ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Thus, the low net income growth of 2.7% seen by Laurus Labs over the past five years could probably be the result of it having a lower ROE.

We then compared Laurus Labs' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Laurus Labs fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Laurus Labs Efficiently Re-investing Its Profits?

A low three-year median payout ratio of 13% (implying that the company retains the remaining 87% of its income) suggests that Laurus Labs is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Laurus Labs has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 14%. Regardless, the future ROE for Laurus Labs is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that the performance shown by Laurus Labs can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.