Will Vistin Pharma ASA (OB:VISTIN) Continue To Underperform Its Industry?

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Vistin Pharma ASA (OB:VISTIN) stock.

Vistin Pharma ASA’s (OB:VISTIN) most recent return on equity was a substandard 6.73% relative to its industry performance of 11.33% over the past year. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into VISTIN's past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of VISTIN's returns. Let me show you what I mean by this. See our latest analysis for Vistin Pharma

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) is a measure of Vistin Pharma’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. If investors diversify their portfolio by industry, they may want to maximise their return in the Pharmaceuticals sector by investing in the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Vistin Pharma’s equity capital deployed. Its cost of equity is 8.40%. Given a discrepancy of -1.67% between return and cost, this indicated that Vistin Pharma may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Vistin Pharma can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether Vistin Pharma is fuelling ROE by excessively raising debt. Ideally, Vistin Pharma should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently, Vistin Pharma has no debt which means its returns are driven purely by equity capital. This could explain why Vistin Pharma's' ROE is lower than its industry peers, most of which may have some degree of debt in its business.

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Vistin Pharma exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. Although ROE can be a useful metric, it is only a small part of diligent research.

For Vistin Pharma, there are three fundamental aspects you should look at:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is Vistin Pharma worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Vistin Pharma is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Vistin Pharma? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.