V.S. Industry Berhad (KLSE:VS) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

V.S. Industry Berhad's (KLSE:VS) stock up by 6.8% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Particularly, we will be paying attention to V.S. Industry Berhad's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for V.S. Industry Berhad

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.S. Industry Berhad is:

7.7% = RM174m ÷ RM2.3b (Based on the trailing twelve months to October 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.08 in profit.

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. 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.

V.S. Industry Berhad's Earnings Growth And 7.7% ROE

At first glance, V.S. Industry Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.6%, so we won't completely dismiss the company. Having said that, V.S. Industry Berhad has shown a meagre net income growth of 3.4% over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that V.S. Industry Berhad's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is VS worth today? The intrinsic value infographic in our free research report helps visualize whether VS is currently mispriced by the market.

Is V.S. Industry Berhad Using Its Retained Earnings Effectively?

While V.S. Industry Berhad has a decent three-year median payout ratio of 45% (or a retention ratio of 55%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, V.S. Industry Berhad 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 49%. However, V.S. Industry Berhad's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Summary

Overall, we have mixed feelings about V.S. Industry Berhad. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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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.