Blau Farmacêutica S.A.'s (BVMF:BLAU3) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Blau Farmacêutica (BVMF:BLAU3) has had a rough three months with its share price down 22%. 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 Blau Farmacêutica'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Blau Farmacêutica

How Is ROE Calculated?

ROE 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 Blau Farmacêutica is:

12% = R$247m ÷ R$2.0b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Blau Farmacêutica's Earnings Growth And 12% ROE

On the face of it, Blau Farmacêutica's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 9.2%, is definitely interesting. This probably goes some way in explaining Blau Farmacêutica's moderate 15% growth over the past five years amongst other factors. 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 Blau Farmacêutica's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is BLAU3 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Blau Farmacêutica Making Efficient Use Of Its Profits?

In Blau Farmacêutica's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 17% (or a retention ratio of 83%), which suggests that the company is investing most of its profits to grow its business.

While Blau Farmacêutica has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 28% over the next three years. Still, forecasts suggest that Blau Farmacêutica's future ROE will rise to 15% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that Blau Farmacêutica's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.