Declining Stock and Solid Fundamentals: Is The Market Wrong About Vitura Health Limited (ASX:VIT)?

Vitura Health (ASX:VIT) has had a rough three months with its share price down 33%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Vitura Health's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Vitura Health

How To Calculate Return On Equity?

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 Vitura Health is:

39% = AU$14m ÷ AU$35m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.39 in profit.

Why Is ROE Important For 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. 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.

Vitura Health's Earnings Growth And 39% ROE

First thing first, we like that Vitura Health has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. Under the circumstances, Vitura Health's considerable five year net income growth of 75% was to be expected.

Next, on comparing with the industry net income growth, we found that Vitura Health's growth is quite high when compared to the industry average growth of 31% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Vitura Health is trading on a high P/E or a low P/E, relative to its industry.

Is Vitura Health Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 54% (implying that it keeps only 46% of profits) for Vitura Health suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While Vitura Health has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 23% over the next three years. Regardless, the future ROE for Vitura Health is predicted to decline to 31% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Vitura Health's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. You can do your own research on Vitura Health and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.