Vital Farms, Inc. (NASDAQ: VITL) shares recently showed weakness, but the financial outlook looks correct: is the market wrong?
Vital Farms (NASDAQ: VITL) had three difficult months with its stock price down 17%. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we have decided to study the ROE of Vital Farms in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Vital Farms
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of Vital Farms is:
5.5% = US $ 8.4 million Ã· US $ 153 million (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.05.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Vital Farms profit growth and 5.5% ROE
At first glance, Vital Farms’ ROE is not much to say. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 11% below the industry average. However, we are pleasantly surprised to see that Vital Farms has increased its net income at a significant rate of 51% over the past five years. Thus, there could be other aspects that positively influence the growth of the company’s profits. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared the growth in net income of Vital Farms with the industry and we are happy to see that the growth number of the company is higher than that of the industry which has a growth rate of 1.3. % during the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. What is VITL worth today? The intrinsic value infographic in our free research report helps to visualize whether VITL is currently poorly valued by the market.
Is Vital Farms Using Its Retained Earnings Effectively?
Overall, we think Vital Farms definitely has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. However, the latest analyst forecasts show that the company will continue to see its profits increase. 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.
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 any of the stocks mentioned.
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