Vetoquinol (EPA: VETO) has had a strong run in the equity market with its stock rising significantly 27% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of Vetoquinol.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Vetoquinol
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Vetoquinol is:
9.9% = 40 million euros ÷ 410 million euros (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.10 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Vetoquinol profit growth and ROE of 9.9%
For starters, Vetoquinol appears to have a respectable ROE. And comparing with the industry, we found that the industry average ROE is similar at 9.9%. Despite this, the growth of Vetoquinol’s net income over five years has been fairly stable over the past five years. We believe there might be other factors at play here that are limiting the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
We then compared Vetoquinol’s net income growth with the industry and found that the company’s growth figure is lower than the industry average growth rate of 9.3% over the same period, which is a little worrying.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is VETO worth today? The intrinsic value infographic in our free research report helps to visualize whether VETO is currently poorly valued by the market.
Is Vetoquinol Using Its Retained Profits Effectively?
Vetoquinol’s low three-year median distribution rate of 16% (implying that the company retains 84% of its revenue) should mean that the company keeps most of its profits to fuel its growth and this should be reflected in its growth figure, but it is not. the case.
In addition, Vetoquinol has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 13% of its profits over the next three years. In any event, Vetoquinol’s future ROE should increase to 13% despite the little change expected in its payout ratio.
Overall, we believe that Vetoquinol has positive attributes. However, given the high ROE and high earnings retention, we would expect the company to show strong earnings growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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