Is GPS Participações e Empreendimentos S.A.'s (BVMF:GGPS3) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

GPS Participações e Empreendimentos' (BVMF:GGPS3) stock is up by a considerable 6.6% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to GPS Participações e Empreendimentos' ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for GPS Participações e Empreendimentos

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 GPS Participações e Empreendimentos is:

21% = R$665m ÷ R$3.2b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.21 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

GPS Participações e Empreendimentos' Earnings Growth And 21% ROE

To start with, GPS Participações e Empreendimentos' ROE looks acceptable. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. Probably as a result of this, GPS Participações e Empreendimentos was able to see an impressive net income growth of 25% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing GPS Participações e Empreendimentos' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.

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. Is GGPS3 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is GPS Participações e Empreendimentos Efficiently Re-investing Its Profits?

GPS Participações e Empreendimentos' three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like GPS Participações e Empreendimentos is reinvesting its earnings efficiently.

Besides, GPS Participações e Empreendimentos has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. Still, forecasts suggest that GPS Participações e Empreendimentos' future ROE will rise to 25% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with GPS Participações e Empreendimentos' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

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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.

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