Will Weakness in Vista Outdoor Inc.'s (NYSE:VSTO) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
September 22, 2021
NYSE:VSTO
Source: Shutterstock

With its stock down 8.0% over the past three months, it is easy to disregard Vista Outdoor (NYSE:VSTO). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Vista Outdoor's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Vista Outdoor

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Vista Outdoor is:

41% = US$328m ÷ US$801m (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.41 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. 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. 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.

Vista Outdoor's Earnings Growth And 41% ROE

First thing first, we like that Vista Outdoor has an impressive ROE. Secondly, even when compared to the industry average of 31% the company's ROE is quite impressive. This probably laid the groundwork for Vista Outdoor's moderate 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Vista Outdoor's growth is quite high when compared to the industry average growth of 7.5% in the same period, which is great to see.

past-earnings-growth
NYSE:VSTO Past Earnings Growth September 22nd 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Vista Outdoor's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Vista Outdoor Efficiently Re-investing Its Profits?

Vista Outdoor doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

In total, we are pretty happy with Vista Outdoor's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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