Declining Stock and Decent Financials: Is The Market Wrong About Valmont Industries, Inc. (NYSE:VMI)?

Valmont Industries (NYSE:VMI) has had a rough three months with its share price down 22%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Valmont Industries' ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Valmont Industries

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 Valmont Industries is:

9.8% = US$152m ÷ US$1.6b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Valmont Industries' Earnings Growth And 9.8% ROE

When you first look at it, Valmont Industries' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 12%. Even so, Valmont Industries has shown a fairly decent growth in its net income which grew at a rate of 20%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Valmont Industries' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 18% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is VMI worth today? The intrinsic value infographic in our free research report helps visualize whether VMI is currently mispriced by the market.

Is Valmont Industries Using Its Retained Earnings Effectively?

Valmont Industries' three-year median payout ratio to shareholders is 21% (implying that it retains 79% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Valmont Industries is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 13% over the next three years.

Summary

In total, it does look like Valmont Industries has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.