Is VICOM Ltd's (SGX:WJP) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 1.8% over the past three months, it is easy to disregard VICOM (SGX:WJP). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study VICOM'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.

See our latest analysis for VICOM

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

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

18% = S$25m ÷ S$135m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.18 in profit.

Why Is ROE Important For 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.

VICOM's Earnings Growth And 18% ROE

At first glance, VICOM seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.2%. Despite this, VICOM's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

As a next step, we compared VICOM's net income growth with the industry and discovered that the industry saw an average growth of 6.5% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about VICOM's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is VICOM Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 94% (implying that the company keeps only 6.4% of its income) of its business to reinvest into its business), most of VICOM's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, VICOM has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about VICOM. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of VICOM's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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