With its stock down 12% over the past week, it is easy to disregard Victorian Plumbing Group (LON:VIC). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Victorian Plumbing Group’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Victorian Plumbing Group
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Victorian Plumbing Group is:
28% = UK£11m ÷ UK£41m (Based on the trailing twelve months to March 2023).
The ‘return’ refers to a company’s earnings over the last year. That means that for every £1 worth of shareholders’ equity, the company generated £0.28 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. 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. 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.
Victorian Plumbing Group’s Earnings Growth And 28% ROE
First thing first, we like that Victorian Plumbing Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn’t go unnoticed by us. Given the circumstances, we can’t help but wonder why Victorian Plumbing Group saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. These include low earnings retention or poor allocation of capital
Next, on comparing with the industry net income growth, we found that Victorian Plumbing Group’s reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
AIM:VIC Past Earnings Growth October 13th 2023
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is VIC worth today? The intrinsic value infographic in our free research report helps visualize whether VIC is currently mispriced by the market.
Is Victorian Plumbing Group Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 36% (implying that the company keeps 64% of its income) over the last three years, Victorian Plumbing Group has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.
Additionally, Victorian Plumbing Group started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 52% over the next three years.
Conclusion
On the whole, we do feel that Victorian Plumbing Group has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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