With its stock down 8.0% in the past three months, it’s easy to overlook Vista Outdoor (NYSE: VSTO). But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In this article, we have decided to focus on Vista Outdoor’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Vista Outdoor
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Vista Outdoor is:
41% = US $ 328 million ÷ US $ 801 million (based on the last twelve months to June 2021).
The “return” is the annual profit. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.41 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. 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.
Vista Outdoor profit growth and 41% ROE
First of all, we love that Vista Outdoor has an impressive ROE. Second, even compared to the industry average of 31%, the company’s ROE is quite impressive. This likely laid the groundwork for Vista Outdoor’s moderate 13% net income growth over the past five years.
Then, comparing with the industry net income growth, we found that Vista Outdoor’s growth is quite high compared to the industry average growth of 7.5% over the same period, this which is great to see.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine if the stock is set for a bright or dark future. If you’re wondering about Vista Outdoor’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is Vista Outdoor Efficiently Reinvesting Its Profits?
Vista Outdoor does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. It certainly contributes to the decent profit growth figure we discussed above.
All in all, we are quite satisfied with the performance of Vista Outdoor. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. That said, looking at current analysts’ estimates, we were concerned that while the company has increased profits in the past, analysts expect its profits to decline in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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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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