V.S.T. Tillers Tractors Limited (NSE:VSTTILLERS) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Most readers would already be aware that V.S.T. Tillers Tractors' (NSE:VSTTILLERS) stock increased significantly by 15% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study V.S.T. Tillers Tractors' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for V.S.T. Tillers Tractors

How Do You 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 V.S.T. Tillers Tractors is:

4.1% = ₹235m ÷ ₹5.8b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.04.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

V.S.T. Tillers Tractors' Earnings Growth And 4.1% ROE

As you can see, V.S.T. Tillers Tractors' ROE looks pretty weak. Even when compared to the industry average of 8.5%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 13% seen by V.S.T. Tillers Tractors over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

That being said, we compared V.S.T. Tillers Tractors' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 9.2% in the same period.

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.S.T. Tillers Tractors fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is V.S.T. Tillers Tractors Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 28% (that is, a retention ratio of 72%), the fact that V.S.T. Tillers Tractors' earnings have shrunk is quite puzzling. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

In addition, V.S.T. Tillers Tractors has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about V.S.T. Tillers Tractors. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for V.S.T. Tillers Tractors by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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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