Stock Analysis

Virbac SA (EPA:VIRP) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

ENXTPA:VIRP
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With its stock down 9.4% over the past month, it is easy to disregard Virbac (EPA:VIRP). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Virbac'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Virbac

How Do You 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 Virbac is:

14% = €141m ÷ €994m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.14.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Virbac's Earnings Growth And 14% ROE

To begin with, Virbac seems to have a respectable ROE. Especially when compared to the industry average of 8.7% the company's ROE looks pretty impressive. Probably as a result of this, Virbac was able to see a decent growth of 14% over the last five years.

We then performed a comparison between Virbac's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.

past-earnings-growth
ENXTPA:VIRP Past Earnings Growth December 4th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Virbac is trading on a high P/E or a low P/E, relative to its industry.

Is Virbac Making Efficient Use Of Its Profits?

In Virbac's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.1% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Virbac has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 10%. Accordingly, forecasts suggest that Virbac's future ROE will be 14% which is again, similar to the current ROE.

Summary

On the whole, we feel that Virbac's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.