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Vesuvius' (LON:VSVS) stock is up by 2.6% 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. Particularly, we will be paying attention to Vesuvius' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Vesuvius
How Is ROE Calculated?
ROE 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 Vesuvius is:
14% = UK£189m ÷ UK£1.3b (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.14.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Vesuvius' Earnings Growth And 14% ROE
At first glance, Vesuvius seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Vesuvius' moderate 13% net income growth seen over the past five years.
As a next step, we compared Vesuvius' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.0%.
Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for VSVS? You can find out in our latest intrinsic value infographic research report.
Is Vesuvius Using Its Retained Earnings Effectively?
Vesuvius has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.