Are V-ZUG Holding AG's (VTX:VZUG) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 8.4% over the past three months, it is easy to disregard V-ZUG Holding (VTX:VZUG). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. In this article, we decided to focus on V-ZUG Holding’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for V-ZUG Holding

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for V-ZUG Holding is:

5.6% = CHF25m ÷ CHF453m (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CHF1 of shareholders’ capital it has, the company made CHF0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of V-ZUG Holding’s Earnings Growth And 5.6% ROE

At first glance, V-ZUG Holding’s ROE doesn’t look very promising. Next, when compared to the average industry ROE of 12%, the company’s ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by V-ZUG Holding over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that V-ZUG Holding’s reported growth was lower than the industry growth of 8.8% in the same period, which is not something we like to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is VZUG fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is V-ZUG Holding Making Efficient Use Of Its Profits?

V-ZUG Holding doesn’t pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can’t use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we have mixed feelings about V-ZUG Holding. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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