VERBUND (VIE: VER) shares have increased significantly by 18% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of VERBUND.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for VERBUND
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of VERBUND is:
11% = 742 million euros ÷ 6.9 billion euros (based on the last twelve months up to June 2021).
The “return” is the annual profit. This therefore means that for 1 € of investment by its shareholder, the company generates a profit of 0.11 €.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. 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.
VERBUND profit growth and ROE of 11%
For starters, VERBUND’s ROE seems acceptable. Especially compared to the industry average of 8.6%, the company’s ROE looks pretty impressive. This likely laid the groundwork for VERBUND’s moderate 16% net income growth seen over the past five years.
Next, comparing with the industry net income growth, we found that VERBUND’s growth is quite high compared to the industry average growth of 5.2% over the same period, which is great to see.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is VERBUND just valued over other companies? These 3 evaluation measures could help you decide.
Does VERBUND effectively reinvest its profits?
VERBUND has a three-year median payout rate of 41%, which means it keeps the remaining 59% of its profits. This suggests that its dividend is well hedged and, given the decent growth seen by the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, VERBUND has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 50% over the next three years. Either way, VERBUND’s future ROE is expected to increase to 14% despite the expected increase in the payout ratio. There could likely be other factors that could be driving future ROE growth.
All in all, we are quite satisfied with the performance of VERBUND. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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