Declining Stock and Solid Fundamentals: Is The Market Wrong About VA Tech Wabag Limited (NSE:WABAG)?
With its stock down 14% over the past three months, it is easy to disregard VA Tech Wabag (NSE:WABAG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on VA Tech Wabag's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
Return on equity 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 VA Tech Wabag is:
14% = ₹3.2b ÷ ₹23b (Based on the trailing twelve months to September 2025).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.14.
Check out our latest analysis for VA Tech Wabag
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
VA Tech Wabag's Earnings Growth And 14% ROE
When you first look at it, VA Tech Wabag's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 8.9% which we definitely can't overlook. Particularly, the substantial 26% net income growth seen by VA Tech Wabag over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
Next, on comparing with the industry net income growth, we found that VA Tech Wabag's growth is quite high when compared to the industry average growth of 3.2% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for WABAG? You can find out in our latest intrinsic value infographic research report.
Is VA Tech Wabag Using Its Retained Earnings Effectively?
VA Tech Wabag's ' three-year median payout ratio is on the lower side at 8.4% implying that it is retaining a higher percentage (92%) of its profits. So it looks like VA Tech Wabag is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, VA Tech Wabag has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 9.5%. As a result, VA Tech Wabag's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.
Conclusion
In total, we are pretty happy with VA Tech Wabag's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.