Declining Stock and Solid Fundamentals: Is The Market Wrong About V-Guard Industries Limited (NSE:VGUARD)?

By
Simply Wall St
Published
November 27, 2021
NSEI:VGUARD
Source: Shutterstock

It is hard to get excited after looking at V-Guard Industries' (NSE:VGUARD) recent performance, when its stock has declined 10% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study V-Guard Industries' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for V-Guard Industries

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 V-Guard Industries is:

18% = ₹2.3b ÷ ₹13b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.18 in profit.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of V-Guard Industries' Earnings Growth And 18% ROE

At first glance, V-Guard Industries seems to have a decent ROE. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. This certainly adds some context to V-Guard Industries' decent 8.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that V-Guard Industries' growth is quite high when compared to the industry average growth of 5.3% in the same period, which is great to see.

past-earnings-growth
NSEI:VGUARD Past Earnings Growth November 28th 2021

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. Doing so will help them establish if the stock's future looks promising or ominous. Is V-Guard Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is V-Guard Industries Making Efficient Use Of Its Profits?

V-Guard Industries has a low three-year median payout ratio of 21%, meaning that the company retains the remaining 79% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, V-Guard Industries has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 27% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we are quite pleased with V-Guard Industries' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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