Veritiv Corporation's (NYSE:VRTV) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.0% over the past three months, it is easy to disregard Veritiv (NYSE:VRTV). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Veritiv'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Veritiv

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Veritiv is:

45% = US$338m ÷ US$756m (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.45.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Veritiv's Earnings Growth And 45% ROE

First thing first, we like that Veritiv has an impressive ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. As a result, Veritiv's exceptional 79% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Veritiv's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 17%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Veritiv's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Veritiv Using Its Retained Earnings Effectively?

Veritiv's ' three-year median payout ratio is on the lower side at 4.0% implying that it is retaining a higher percentage (96%) of its profits. So it looks like Veritiv is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Conclusion

In total, we are pretty happy with Veritiv's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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