In This Article:
Most readers would already be aware that Vistry Group's (LON:VTY) stock increased significantly by 13% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Vistry 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.
View our latest analysis for Vistry Group
How Do You Calculate Return On Equity?
Return on equity 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 Vistry Group is:
11% = UK£254m ÷ UK£2.4b (Based on the trailing twelve months to December 2021).
The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.11 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. 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. 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 Vistry Group's Earnings Growth And 11% ROE
At first glance, Vistry Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to Vistry Group's moderate 13% net income growth seen over the past five years.
Given that the industry shrunk its earnings at a rate of 7.0% in the same period, the net income growth of the company is quite impressive.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is VTY worth today? The intrinsic value infographic in our free research report helps visualize whether VTY is currently mispriced by the market.
Is Vistry Group Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Vistry Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.