As analysts forecast Torrent Pharmaceuticals Limited (NSEI:TORNTPHARM) to report robust earnings growth of 16.09% over the next year, it’s necessary to take a moment and evaluate this encouraging sentiment. Investors should consider the forces that are driving this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, I will try to evaluate Torrent Pharmaceuticals’s margin behaviour to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for TORNTPHARM’s returns relative to its competitors.
Breaking Down TORNTPHARM’s Profit Margin
At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating TORNTPHARM’s profit margin.
Margin Calculation for TORNTPHARM
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 8.27 Billion ÷ 56.39 Billion = 14.66%
Torrent Pharmaceuticals’s margin has expanded in the past five years, with average net income growth of 22.70% exceeding a 16.22% average growth in revenue, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. The current 14.66% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.
What can we tell from future expectations?
Margins are expected to expand further, with an expectation of 14.32% in annual revenue growth and a forecasted 17.56% in annual net income growth. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Despite this, those interested in the company should remember that a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. In Torrent Pharmaceuticals’s case, future profit margin is expected to expand along with the margins in the Pharmaceuticals industry, whilst at the same time, TORNTPHARM’s forecasted ROE of 19.00% exceeds that of the expected 13.83% ROE of the industry (note that this observation is also influenced by relative debt levels). This highlights that analysts are confident that the underlying earnings characteristics mentioned above will provide a higher return for shareholders in relation to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on Torrent Pharmaceuticals’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For TORNTPHARM, I’ve put together three pertinent factors you should further examine:
1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is TORNTPHARM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TORNTPHARM is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TORNTPHARM? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!