Vardhman Textiles Limited (NSE:VTL) Stock’s Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 8.1% over the past month, it is easy to disregard Vardhman Textiles (NSE:VTL). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Vardhman Textiles’ ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Vardhman Textiles

How To 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 Vardhman Textiles is:

15% = ₹13b ÷ ₹84b (Based on the trailing twelve months to September 2022).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.15 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Vardhman Textiles’ Earnings Growth And 15% ROE

To start with, Vardhman Textiles’ ROE looks acceptable. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. Probably as a result of this, Vardhman Textiles was able to see a decent growth of 20% over the last five years.

Next, on comparing Vardhman Textiles’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 19% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for VTL? You can find out in our latest intrinsic value infographic research report.

Is Vardhman Textiles Efficiently Re-investing Its Profits?

While Vardhman Textiles has a three-year median payout ratio of 94% (which means it retains 5.6% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.

Moreover, Vardhman Textiles 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.

Summary

In total, it does look like Vardhman Textiles has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.