Vátryggingafélag Íslands hf.'s (ICE:VIS) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?
Vátryggingafélag Íslands hf's (ICE:VIS) stock is up by a considerable 15% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Vátryggingafélag Íslands hf's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Vátryggingafélag Íslands hf
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 Vátryggingafélag Íslands hf is:
4.7% = Kr714m ÷ Kr15b (Based on the trailing twelve months to September 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ISK1 of shareholders' capital it has, the company made ISK0.05 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Vátryggingafélag Íslands hf's Earnings Growth And 4.7% ROE
It is quite clear that Vátryggingafélag Íslands hf's ROE is rather low. Not just that, even compared to the industry average of 8.8%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 6.6% seen by Vátryggingafélag Íslands hf over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
That being said, we compared Vátryggingafélag Íslands hf's 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 6.7% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. 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 Vátryggingafélag Íslands hf is trading on a high P/E or a low P/E, relative to its industry.
Is Vátryggingafélag Íslands hf Using Its Retained Earnings Effectively?
While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Vátryggingafélag Íslands hf. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Vátryggingafélag Íslands hf's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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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About ICSE:SKAGI
Vátryggingafélag Íslands hf
Provides various insurance products and services in Iceland.
Moderate not a dividend payer.