Yahoo Finance Are Vita Life Sciences Limited's (ASX:VLS) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
Vita Life Sciences (ASX:VLS) has had a rough three months with its share price down 7.8%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Vita Life Sciences' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Vita Life Sciences
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Vita Life Sciences is:
24% = AU$5.9m ÷ AU$24m (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.24 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Vita Life Sciences' Earnings Growth And 24% ROE
First thing first, we like that Vita Life Sciences has an impressive ROE. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. Yet, Vita Life Sciences has posted measly growth of 2.7% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that Vita Life Sciences' reported growth was lower than the industry growth of 20% in the same period, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Vita Life Sciences fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Vita Life Sciences Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 65% (or a retention ratio of 35%), most of Vita Life Sciences' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, Vita Life Sciences has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
In total, it does look like Vita Life Sciences has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Vita Life Sciences by visiting our risks dashboard for free on our platform here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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