It’s hard to get excited after looking at the recent performance of Vitrolife (STO: VITR), as its stock has fallen 3.9% over the past month. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In particular, we will pay particular attention to the ROE of Vitrolife today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Vitrolife
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of Vitrolife is:
7.2% = kr418m kr5.8b (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for each SEK1 of the investments of its shareholder, the company generates a profit of SEK0.07.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or âkeepâ, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
7.2% profit growth and ROE of Vitrolife
When you first look at it, Vitrolife’s ROE doesn’t look so appealing. Then, compared to the industry average ROE of 11%, the company’s ROE leaves us even less enthusiastic. However, we can see that Vitrolife has seen modest net income growth of 11% over the past five years. Thus, the growth in the company’s profits could probably have been caused by other variables. For example, the business has a low payout ratio or is managed efficiently.
We then performed a comparison of Vitrolife’s net income growth with industry, which found that the company’s growth is similar to the industry’s average growth of 11% over the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. A 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 outlook. So, you might want to check if Vitrolife is trading high P / E or low P / E, relative to its industry.
Is Vitrolife using its benefits effectively?
Vitrolife has a three-year median payout rate of 27%, which means it keeps the remaining 73% of its profits. This suggests that its dividend is well hedged and, given the decent growth of the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, Vitrolife has paid dividends over a period of at least ten years, which means that the company is very serious about sharing its profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 25%. However, Vitrolife’s future ROE is expected to decline to 5.2% despite the expected little change in the company’s payout ratio.
All in all, it seems that Vitrolife has positive aspects for its business. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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