Village Super Market, Inc.'s (NASDAQ:VLGE.A) Stock Been Rising But Financials Look Weak: Should Shareholders Be Worried?

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Village Super Market’s (NASDAQ:VLGE.A) stock up by 3.0% over the past month. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company’s financials don’t look very promising. Particularly, we will be paying attention to Village Super Market’s ROE today.

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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Village Super Market

How To Calculate Return On Equity?

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 Village Super Market is:

6.6% = US$24m ÷ US$362m (Based on the trailing twelve months to April 2022).

The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.07.

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. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Village Super Market’s Earnings Growth And 6.6% ROE

On the face of it, Village Super Market’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 13% either. Hence, the flat earnings seen by Village Super Market over the past five years could probably be the result of it having a lower ROE.

We then compared Village Super Market’s net income growth with the industry and found that the average industry growth rate was 7.8% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is VLGE.A fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Village Super Market Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 61% (implying that the company keeps only 39% of its income) of its business to reinvest into its business), most of Village Super Market’s profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Village Super Market has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, Village Super Market’s performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it’s not surprising to see the lack or absence of growth in its earnings. Up till now, we’ve only made a short study of the company’s growth data. To gain further insights into Village Super Market’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.