Dr. Lal PathLabs: A look at the ROE of the company 2022
Dr. Lal PathLabs: Return On Equity Analysis
The Oracle of Omaha, Warren Buffett, famously said, “The best investment you can make is an investment in yourself. The more you learn, the more you will earn.” With this in mind, in this article, we will look at how we can use Return On Equity to gauge a company’s profitability and how efficient it is in generating profits.
How is ROE calculated?
The basic method of calculating ROE is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
But this method does not tell the whole story. We should also look at how efficiently the company is using its assets and what is the company’s debt level relative to equity, because a high debt level relative to equity may also make ROE appear high. So, we can use the DuPont ROE formula to analyse the ROE in a better way.
DuPont ROE = (Net Income/Net Sales) * (Net Sales/Total Assets) * (Total Assets/Total Equity)
DuPont ROE = (Profit Margin * Total Asset Turnover * Equity Multiplier)
Let’s look at Dr. Lal PathLabs’ income statement and balance sheet, and then we will calculate the ROE.
Required data from the Standalone income statement and balance sheet of Dr. Lal PathLabs for the year ended 31 March 2022 and 2021.
Return on Equity calculation using basic ROE formula:
Return on Equity (2022) = 3,440.54 ÷ 14,764.69 = 23.30%
Return on Equity (2021) = 2,801.06 ÷ 12,170.85 = 23.01%
Sorry I am not able to bring table here. See ROE table
As we noted above, the basic ROE formula and DuPont Formula provide us with the same answer. However, by using DuPont analysis we can see that the company is using its assets efficiently to generate high revenue and the company is also able to turn a good percentage of revenue into net profit. Here we can also see that the equity multiplier of the company is also not so high. It means that the assets are mostly funded by equity and retained earnings and the company does not use so much debt.
Now, to know whether an ROE of a company is good or bad, we will compare it with its industry average. The average ROE of companies in the healthcare industry having similar market capitalisation as that of Dr. Lal PathLabs is approximately 18%. So, the ROE of Dr. Lal PathLabs seems more impressive when compared to the average ROE of its peers.
Conclusion:
Although Dr. Lal PathLabs does use debt, its debt level is still low. The company has a high return on equity of 23.30%. It means the company is reinvesting its retained earnings efficiently to generate a high rate of return. This has caused substantial growth in the earnings of the company. The net Profit of the company has grown from Rs.168.00 crore in 2018 to Rs.344.10 crore in 2022.
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