Can Mixed Fundamentals Have A Negative Impact on Unicasa Indústria de Móveis S.A. (BVMF:UCAS3) Current Share Price Momentum?

Most readers would already be aware that Unicasa Indústria de Móveis' (BVMF:UCAS3) stock increased significantly by 15% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Unicasa Indústria de Móveis' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Unicasa Indústria de Móveis

How Do You Calculate Return On Equity?

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 Unicasa Indústria de Móveis is:

9.3% = R$15m ÷ R$160m (Based on the trailing twelve months to March 2020).

The 'return' is the income the business earned over the last year. That means that for every R$1 worth of shareholders' equity, the company generated R$0.09 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. 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 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.

Unicasa Indústria de Móveis' Earnings Growth And 9.3% ROE

It is quite clear that Unicasa Indústria de Móveis' ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.3%. Moreover, we are quite pleased to see that Unicasa Indústria de Móveis' net income grew significantly at a rate of 23% over the last five years. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. Such as - high earnings retention or an efficient management in place.

Given that the industry shrunk its earnings at a rate of 17% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Unicasa Indústria de Móveis''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Unicasa Indústria de Móveis Efficiently Re-investing Its Profits?

Unicasa Indústria de Móveis' very high three-year median payout ratio of 101% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 3 risks we have identified for Unicasa Indústria de Móveis.

Moreover, Unicasa Indústria de Móveis is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

On the whole, we feel that the performance shown by Unicasa Indústria de Móveis can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Unicasa Indústria de Móveis and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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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