Is RPG Life Sciences Limited's(NSE:RPGLIFE) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
September 21, 2021
NSEI:RPGLIFE
Source: Shutterstock

RPG Life Sciences' (NSE:RPGLIFE) stock is up by a considerable 52% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on RPG Life Sciences' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for RPG Life Sciences

How Is ROE Calculated?

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 RPG Life Sciences is:

21% = ₹445m ÷ ₹2.2b (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.21 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. 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.

RPG Life Sciences' Earnings Growth And 21% ROE

To begin with, RPG Life Sciences seems to have a respectable ROE. On comparing with the average industry ROE of 17% the company's ROE looks pretty remarkable. This probably laid the ground for RPG Life Sciences' significant 23% net income growth seen over the past five years. We believe that there might also 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 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 22% in the same period.

past-earnings-growth
NSEI:RPGLIFE Past Earnings Growth September 21st 2021

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about RPG Life Sciences''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is RPG Life Sciences Efficiently Re-investing Its Profits?

RPG Life Sciences' ' three-year median payout ratio is on the lower side at 23% implying that it is retaining a higher percentage (77%) of its profits. So it looks like RPG Life Sciences is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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

On the whole, we feel that RPG Life Sciences' performance has been quite good. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. 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. 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.
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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.