It is hard to get excited after looking at Vishay Precision Group’s (NYSE:VPG) recent performance, when its stock has declined 40% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Vishay Precision Group’s 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.
How Do You 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 Vishay Precision Group is:
9.2% = US$22m ÷ US$242m (Based on the trailing twelve months to December 2019).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.09.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. 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.
A Side By Side comparison of Vishay Precision Group’s Earnings Growth And 9.2% ROE
On the face of it, Vishay Precision Group’s ROE is not much to talk about. However, given that the company’s ROE is similar to the average industry ROE of 11%, we may spare it some thought. Looking at Vishay Precision Group’s exceptional 53% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Vishay Precision Group’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). 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 Vishay Precision Group is trading on a high P/E or a low P/E, relative to its industry.
Is Vishay Precision Group Efficiently Re-investing Its Profits?
Given that Vishay Precision Group doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we do feel that Vishay Precision Group has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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