Vikas Lifecare (NSE: VIKASLIFE) has had a strong run in the equity market with its shares rising a significant 20% over the past three months. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In this article, we decided to focus on the ROE of Vikas Lifecare.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest review for Vikas Lifecare
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Vikas Lifecare is:
1.3% = ₹17 million ÷ ₹1.3 billion (based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every ₹1 worth of equity, the company was able to earn ₹0.01 in profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Vikas Lifecare earnings growth and ROE of 1.3%
As you can see, Vikas Lifecare’s ROE seems quite low. Even compared to the industry average of 9.1%, the ROE figure is quite disappointing. For this reason, Vikas Lifecare’s 34% drop in net income over five years is not surprising given its low ROE. We believe there could be other factors at play here as well. For example, the company has misallocated capital or the company has a very high payout ratio.
So, in a next step, we benchmarked Vikas Lifecare’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 18%. during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you may want to check whether Vikas Lifecare is trading on a high P/E or a low P/E, relative to its industry.
Is Vikas Lifecare effectively using its retained earnings?
Vikas Lifecare does not pay any dividends, which means the company keeps all its profits, which makes us wonder why it keeps its profits if it cannot use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Overall, we believe that the performance shown by Vikas Lifecare can be open to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. Our risk dashboard would have the 5 risks we identified for Vikas Lifecare.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.