Ajanta Pharma (NSE:AJANTPHARM) has had a rough three months with its share price down 5.9%. 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. In this article, we decided to focus on Ajanta Pharma’s 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Ajanta Pharma is:
24% = ₹9.0b ÷ ₹37b (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. That means that for every ₹1 worth of shareholders’ equity, the company generated ₹0.24 in profit.
View our latest analysis for Ajanta Pharma
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Ajanta Pharma’s Earnings Growth And 24% ROE
To start with, Ajanta Pharma’s ROE looks acceptable. Especially when compared to the industry average of 13% the company’s ROE looks pretty impressive. Probably as a result of this, Ajanta Pharma was able to see a decent growth of 10.0% over the last five years.
Next, on comparing Ajanta Pharma’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 12% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Ajanta Pharma’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ajanta Pharma Using Its Retained Earnings Effectively?
Ajanta Pharma has a low three-year median payout ratio of 19%, meaning that the company retains the remaining 81% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Ajanta Pharma 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 22%. As a result, Ajanta Pharma’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 24% for future ROE.
Conclusion
Overall, we are quite pleased with Ajanta Pharma’s 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. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.
