Yahoo Finance With An ROE Of 18.78%, Has VS.T. Tillers Tractors Limited’s (NSE:VSTTILLERS) Management Done Well?
VS.T. Tillers Tractors Limited (NSEI:VSTTILLERS) delivered an ROE of 18.78% over the past 12 months, which is an impressive feat relative to its industry average of 10.57% during the same period. On the surface, this looks fantastic since we know that VSTTILLERS has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable VSTTILLERS’s ROE is. Check out our latest analysis for V.S.T. Tillers Tractors
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of V.S.T. Tillers Tractors’s profit relative to its shareholders’ equity. For example, if the company invests ₹1 in the form of equity, it will generate ₹0.19 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of V.S.T. Tillers Tractors’s equity capital deployed. Its cost of equity is 13.55%. This means V.S.T. Tillers Tractors returns enough to cover its own cost of equity, with a buffer of 5.23%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from V.S.T. Tillers Tractors’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine V.S.T. Tillers Tractors’s debt-to-equity level. Currently, V.S.T. Tillers Tractors has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. V.S.T. Tillers Tractors exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For V.S.T. Tillers Tractors, I’ve compiled three pertinent factors you should look at:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is V.S.T. Tillers Tractors worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether V.S.T. Tillers Tractors is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of V.S.T. Tillers Tractors? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
