Stock Analysis

Declining Stock and Solid Fundamentals: Is The Market Wrong About RPG Life Sciences Limited (NSE:RPGLIFE)?

NSEI:RPGLIFE
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It is hard to get excited after looking at RPG Life Sciences' (NSE:RPGLIFE) recent performance, when its stock has declined 9.3% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study RPG Life Sciences' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for RPG Life Sciences

How Do You Calculate Return On Equity?

Return on equity 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 RPG Life Sciences is:

16% = ₹311m ÷ ₹2.0b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.16 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

RPG Life Sciences' Earnings Growth And 16% ROE

To begin with, RPG Life Sciences seems to have a respectable ROE. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This certainly adds some context to RPG Life Sciences' decent 16% net income growth seen over the past five years.

Next, on comparing RPG Life Sciences' 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.

past-earnings-growth
NSEI:RPGLIFE Past Earnings Growth November 12th 2020

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is RPG Life Sciences fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is RPG Life Sciences Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 26% (implying that the company retains 74% of its profits), it seems that RPG Life Sciences is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, RPG Life Sciences has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with RPG Life Sciences' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for RPG Life Sciences 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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