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

VST Industries' (NSE:VSTIND) stock is up by a considerable 14% over the past month. 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.

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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 VST Industries is:

29% = ₹3.3b ÷ ₹11b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.29 in profit.

Check out our latest analysis for VST Industries

Why Is ROE Important For 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.

A Side By Side comparison of VST Industries' Earnings Growth And 29% ROE

Firstly, we acknowledge that VST Industries has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. Given the circumstances, we can't help but wonder why VST Industries saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared VST Industries' net income growth with the industry and discovered that the industry saw an average growth of 7.5% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is VST Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is VST Industries Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 71% (implying that the company keeps only 29% of its income) of its business to reinvest into its business), most of VST Industries' profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, VST Industries 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 60%. Still, forecasts suggest that VST Industries' future ROE will drop to 22% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that VST Industries certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.