It is hard to get excited after looking at Vaidya Sane Ayurved Laboratories’ (NSE:MADHAVBAUG) recent performance, when its stock has declined 14% over the past three months. 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 Vaidya Sane Ayurved Laboratories’ 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for Vaidya Sane Ayurved Laboratories
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Vaidya Sane Ayurved Laboratories is:
6.0% = ₹33m ÷ ₹548m (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.06 in profit.
What Has ROE Got To Do With 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. 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.
Vaidya Sane Ayurved Laboratories’ Earnings Growth And 6.0% ROE
It is hard to argue that Vaidya Sane Ayurved Laboratories’ ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company’s ROE is quite dismal. Despite this, surprisingly, Vaidya Sane Ayurved Laboratories saw an exceptional 39% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Vaidya Sane Ayurved Laboratories’ growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Vaidya Sane Ayurved Laboratories is trading on a high P/E or a low P/E, relative to its industry.
Is Vaidya Sane Ayurved Laboratories Using Its Retained Earnings Effectively?
Vaidya Sane Ayurved Laboratories’ three-year median payout ratio to shareholders is 8.1%, which is quite low. This implies that the company is retaining 92% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
While Vaidya Sane Ayurved Laboratories has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
Summary
On the whole, we do feel that Vaidya Sane Ayurved Laboratories has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 3 risks we have identified for Vaidya Sane Ayurved Laboratories by visiting our risks dashboard for free on our platform here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
