Could Village Super Market, Inc.'s (NASDAQ:VLGE.A) Weak Financials Mean That The Market Could Correct Its Share Price?

By
Simply Wall St
Published
May 31, 2021
NasdaqGS:VLGE.A
Source: Shutterstock

Village Super Market's (NASDAQ:VLGE.A) stock is up by 2.9% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Specifically, we decided to study Village Super Market'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Village Super Market

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 Village Super Market is:

8.4% = US$28m ÷ US$336m (Based on the trailing twelve months to January 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.08 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. 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.

Village Super Market's Earnings Growth And 8.4% ROE

When you first look at it, Village Super Market's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 13%, the company's ROE leaves us feeling even less enthusiastic. As a result, Village Super Market's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Village Super Market's net income growth with the industry and discovered that the industry saw an average growth of 12% in the same period.

past-earnings-growth
NasdaqGS:VLGE.A Past Earnings Growth May 31st 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Village Super Market is trading on a high P/E or a low P/E, relative to its industry.

Is Village Super Market Efficiently Re-investing Its Profits?

Village Super Market has a high three-year median payout ratio of 57% (or a retention ratio of 43%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

In addition, Village Super Market has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Village Super Market's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Village Super Market's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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