Is Yduqs Participações S.A.'s (BVMF:YDUQ3) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Yduqs Participações' (BVMF:YDUQ3) stock increased significantly by 18% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Yduqs Participações' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Yduqs Participações

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Yduqs Participações is:

18% = R$573m ÷ R$3.3b (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Yduqs Participações' Earnings Growth And 18% ROE

When you first look at it, Yduqs Participações' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 10% doesn't go unnoticed by us. This certainly adds some context to Yduqs Participações' moderate 11% net income growth seen over the past five years. 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. Such as- high earnings retention or the company belonging to a high growth industry.

We then performed a comparison between Yduqs Participações' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Yduqs Participações fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yduqs Participações Using Its Retained Earnings Effectively?

Yduqs Participações' three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Yduqs Participações is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 46% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Yduqs Participações' 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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