Is Veidekke ASA's (OB:VEI) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that Veidekke's (OB:VEI) stock increased by 9.9% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Veidekke's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Veidekke

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Veidekke is:

47% = kr1.4b ÷ kr2.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every NOK1 worth of shareholders' equity, the company generated NOK0.47 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. 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. 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.

Veidekke's Earnings Growth And 47% ROE

Firstly, we acknowledge that Veidekke has a significantly high ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. So, the substantial 20% net income growth seen by Veidekke over the past five years isn't overly surprising.

We then compared Veidekke's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year 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 Veidekke fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Veidekke Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 99% (implying that it keeps only 1.4% of profits) for Veidekke suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Veidekke has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 80% of its profits over the next three years. As a result, Veidekke's ROE is not expected to change by much either, which we inferred from the analyst estimate of 38% for future ROE.

Conclusion

On the whole, we do feel that Veidekke has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.