With the stock down 15% over the past three months, it’s easy to overlook the Victorian Plumbing Group (LON:VIC). However, stock prices are usually driven over the long term by a company’s financials, which in this case look pretty respectable. In this article we have chosen to focus on the ROE of the Victorian Plumbing Group.
Return on equity, or ROE, is a test of how effectively a company is adding value and managing investors’ money. In short, ROE shows the profit each dollar generates in terms of its shareholders’ investments.
Check out our latest analysis for the Victorian Plumbing Group
How do you calculate return on equity?
The Formula for ROE Is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for the Victorian Plumbing Group is:
28% = £11m ÷ £41m (based on trailing 12 months to March 2023).
The “return” is the amount that has been earned in the last twelve months after taxes. This means that for every £1 of equity the company made £0.28 of profit.
What does ROE have to do with earnings growth?
So far we’ve learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company reinvests, or “retains,” we can then assess a company’s future ability to generate profits. Assuming all else being equal, companies that have both a higher return on equity and higher earnings retention tend to be those that have a higher growth rate compared to companies that don’t share the same characteristics.
Victorian Plumbing Group earnings growth and 28% ROE
First, we like that the Victorian Plumbing Group has an impressive ROE. Second, we also see a comparison to the industry average ROE of 17%. However, we are curious to see how the high returns over the past five years have nonetheless led to stagnant growth at the Victorian Plumbing Group. So, there could be other aspects that might be hampering the company’s growth. These include poor earnings retention or poor capital allocation
As a next step, we compared Victorian Plumbing Group’s net income growth to that of the industry and were disappointed to find that the company’s growth was below the industry average of 16% over the same period.
AIM:VIC Past Earnings Growth, June 29, 2023
Earnings growth is an important metric to consider when evaluating a stock. Next, investors need to determine whether or not expected earnings growth is already embedded in the stock price. This then helps them determine whether the stock has a bright future or a bleak future. What is VIC worth today? The intrinsic value infographic in our free research report helps illustrate if VIC is currently being mispriced by the market.
Is the Victorian Plumbing Group using its retained earnings effectively?
Despite a normal three-year average payout ratio of 36% (or a retention ratio of 64%), the Victorian Plumbing Group hasn’t had much earnings growth. Therefore, there could be other reasons that explain the lack in this regard. For example, business could be declining.
Our latest analyst data shows that the company’s future payout ratio is expected to be around 34% over the next three years. As a result, the ROE of the Victorian Plumbing Group is also unlikely to change significantly, which is what we derived from the analyst estimate of 27% for the future ROE.
Summary
Overall, we think the Victorian Plumbing Group has some positive attributes. However, given the high ROE and high earnings retention, we would expect the company to deliver strong earnings growth, but that’s not the case here. This suggests that there may be an external threat to the company that is hampering its growth. However, the latest analyst forecasts suggest that the company will continue to post earnings growth. To learn more about the company’s future earnings growth projections, take a look here free Check out analyst forecasts for the company to learn more.
Assessment is complex, but we help make it simple.
Find out if Victorian Plumbing Group might be over or undervalued by viewing our comprehensive analysis Fair value estimates, risks and cautions, dividends, insider trading and financial health.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts solely using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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