Is Torrent Pharmaceuticals Limited's (NSE:TORNTPHARM) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Torrent Pharmaceuticals' (NSE:TORNTPHARM) stock increased significantly by 7.1% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Torrent 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Torrent Pharmaceuticals

How To 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 Torrent Pharmaceuticals is:

20% = ₹13b ÷ ₹62b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.20 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Torrent Pharmaceuticals' Earnings Growth And 20% ROE

To start with, Torrent Pharmaceuticals' ROE looks acceptable. On comparing with the average industry ROE of 16% the company's ROE looks pretty remarkable. Probably as a result of this, Torrent Pharmaceuticals was able to see a decent growth of 8.9% over the last five years.

Next, on comparing with the industry net income growth, we found that Torrent Pharmaceuticals' reported growth was lower than the industry growth of 22% in the same period, which is not something we like to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Torrent Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.

Is Torrent Pharmaceuticals Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that Torrent Pharmaceuticals is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Torrent Pharmaceuticals is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 31% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with Torrent Pharmaceuticals' 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 a good amount of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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