What You Must Know About VIP Clothing Limited’s (NSE:VIPCLOTHNG) Return on Equity
VIP Clothing Limited (NSEI:VIPCLOTHNG) delivered a less impressive 1.21% ROE over the past year, compared to the 8.39% return generated by its industry. Though VIPCLOTHNG’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on VIPCLOTHNG’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of VIPCLOTHNG’s returns. See our latest analysis for VIP Clothing
Breaking down Return on Equity
Return on Equity (ROE) is a measure of VIP Clothing’s profit relative to its shareholders’ equity. For example, if the company invests ₹1 in the form of equity, it will generate ₹0.01 in earnings from this. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of VIP Clothing’s equity capital deployed. Its cost of equity is 13.40%. Since VIP Clothing’s return does not cover its cost, with a difference of -12.19%, this means its current use of equity is not efficient and not sustainable. Very simply, VIP Clothing pays more for its capital than what it generates in return. ROE can be dissected into three distinct 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from VIP Clothing’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt VIP Clothing currently has. The debt-to-equity ratio currently stands at a sensible 65.08%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. VIP Clothing’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For VIP Clothing, I’ve compiled three fundamental factors you should further examine:
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 VIP Clothing 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 VIP Clothing is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of VIP Clothing? 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.
