Should Weakness in Victorian Plumbing Group plc’s (LON:VIC) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With the stock down 13% in the last three months, it's easy to ignore Victorian Plumbing Group (LON:VIC). However, stock prices are usually determined by a company's financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Victorian Plumbing Group's ROE.

Return on equity or ROE is an important factor that a shareholder must consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on capital provided by the company's shareholders.

Check out our latest analysis for Victorian Plumbing Group

How do you calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Victorian Plumbing Group is:

24% = £12m ÷ £49m (based on trailing twelve months to September 2023).

The “return” is the annual profit. Another way to think of it is that for every £1 worth of equity, the company was able to make a profit of £0.24.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of ​​the company's growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company's growth rate will be compared to companies that don't necessarily share these characteristics.

A Side-by-Side Comparison of Victorian Plumbing Group's Earnings Growth and ROE of 24%

Firstly, we like that Victorian Plumbing Group has an impressive ROE. Secondly, we can't help but compare it with the industry's average ROE of 15%. Still, Victorian Plumbing Group's five-year net income growth has been fairly flat over the past five years. Based on this, we believe that there could be other reasons, not previously discussed in this article, that could hinder the company's growth. These include low profit retention or poor capital allocation

The story goes on

Next, when comparing with the industry's net income growth, we found that the industry grew its profits by 19% in the last few years.

Past earnings growth

The basis for a company's valuation depends to a large extent on earnings growth. It is important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This will give them an idea of ​​whether the stock is headed to clear, blue waters or whether swampy waters await them. What is VIC worth today? The intrinsic value infographic in our free research report helps illustrate whether VIC is currently mispriced by the market.

Is Victorian Plumbing Group using its retained earnings effectively?

Despite a normal three-year average payout ratio of 36% (or a retention ratio of 64%), Victorian Plumbing Group didn't see much profit growth. Therefore, there could be other reasons that explain the deficiency in this regard. For example, business could be down.

Furthermore, Victorian Plumbing Group only recently started paying a dividend, so management must have decided that shareholders prefer dividends to profit growth. By examining the latest analyst consensus data, we found that the company's future payout ratio is expected to rise to 55% over the next three years. However, despite the expected higher payout ratio, the company's ROE is not expected to change significantly.

Summary

Overall, it looks like Victorian Plumbing Group has some positive aspects to its business. Still, the low earnings growth is a bit worrying, especially given that the company earns a high rate of return and reinvests a large portion of its profits. It looks like there may be other factors preventing growth that aren't necessarily in control of the company. With this in mind, we examined the latest analyst forecasts and found that while the company has shrunk its profits in the past, analysts expect its profits to grow in the future. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.