Could the market be wrong about Victorian Plumbing Group plc (LON:VIC) given its attractive financial outlook?

Victorian Plumbing Group (LON:VIC) had a tough three months with its share price down 42%. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial health. Specifically, we decided to study the ROE of Victorian Plumbing Group in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Victorian Plumbing Group

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Victorian Plumbing Group is:

13% = £4.7m ÷ £35m (based on trailing 12 months to March 2022).

The “return” is the annual profit. This means that for every £1 of equity, the company generated £0.13 of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Victorian Plumbing Group’s earnings growth and 13% ROE

For starters, Victorian Plumbing Group seems to have a respectable ROE. Even compared to the industry average of 11%, the company’s ROE looks pretty decent. Hence, this likely laid the foundation for the decent 17% growth seen over the past five years by Victorian Plumbing Group.

Then, comparing with the growth in net income of the industry, we found that the growth of Victorian Plumbing Group is quite high compared to the industry average growth of 11% over the same period, which is great to see.

AIM:VIC Past Earnings Growth August 31, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. 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. So, you might want to check if Victorian Plumbing Group is trading on a high P/E or a low P/E, relative to its industry.

Does Victorian Plumbing Group make effective use of its profits?

Victorian Plumbing Group currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the decent number of earnings growth we discussed above.

Conclusion

Overall, we believe the performance of Victorian Plumbing Group has been quite good. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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.

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