Has VST Industries Limited's (NSE:VSTIND) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

VST Industries (NSE:VSTIND) has had a great run on the share market with its stock up by a significant 8.2% over the last week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study VST Industries' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for VST Industries

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 VST Industries is:

25% = ₹2.8b ÷ ₹11b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.25.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

VST Industries' Earnings Growth And 25% ROE

To start with, VST Industries' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 21%. This probably goes some way in explaining VST Industries' moderate 5.5% growth over the past five years amongst other factors.

We then compared VST Industries' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.7% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for VSTIND? You can find out in our latest intrinsic value infographic research report

Is VST Industries Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for VST Industries suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, VST Industries 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.

Conclusion

On the whole, we do feel that VST Industries has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on VST Industries 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.