VA Tech Wabag Limited (NSE: WABAG) action rallies, but finance looks ambiguous: will momentum continue?
VA Tech Wabag (NSE: WABAG) stock has risen 12% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In this article, we have decided to focus on the ROE of VA Tech Wabag.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for VA Tech Wabag
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of VA Tech Wabag is:
6.7% = ₹ 882 million ÷ ÷ 13 billion (based on the last twelve months up to December 2020).
The “return” is the income the business has earned over the past year. Another way to think about this is that for every ₹ 1 worth of equity, the company was able to earn ₹ 0.07 in profit.
What does ROE have to do with profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.
6.7% profit growth and ROE of VA Tech Wabag
It is clear that the ROE of VA Tech Wabag is rather low. Even compared to the industry’s average ROE of 9.6%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 2.5% five-year drop in net income seen by VA Tech Wabag may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.
Therefore, we compared the performance of VA Tech Wabag to that of the industry and were disappointed to find that although the company was slashing profits, the industry increased its profits at a rate of 8.8%. during the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. This will help them determine if the future of the stock looks bright or worrisome. Has the market taken into account the future prospects of WABAG? You can find out in our latest Intrinsic Value infographic research report.
Is VA Tech Wabag Efficiently Using Its Retained Earnings?
Although the company has paid part of its dividend in the past, it does not currently pay a dividend. This implies that potentially all of its profits are reinvested in the business.
Current analysts’ estimates suggest the company’s future payout ratio is expected to drop to 15% over the next three years. The fact that the company’s ROE is expected to drop to 11% over the same period is explained by the drop in the payout ratio.
Overall, we believe that the performance shown by VA Tech Wabag can be open to many interpretations. Even though he seems to be keeping most of his earnings, given the low ROE, investors may not be benefiting from all this reinvestment after all. The weak earnings growth suggests that our theory is correct. Having said that, looking at current analysts’ estimates, we saw that the company’s earnings growth rate is expected to improve dramatically. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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