Arezzo Indústria e Comércio S.A.'s (BVMF:ARZZ3) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Arezzo Indústria e Comércio (BVMF:ARZZ3) has had a great run on the share market with its stock up by a significant 8.2% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Arezzo Indústria e Comércio's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Arezzo Indústria e Comércio

How Do You Calculate Return On Equity?

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 Arezzo Indústria e Comércio is:

14% = R$399m ÷ R$2.9b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax 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$0.14 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Arezzo Indústria e Comércio's Earnings Growth And 14% ROE

On the face of it, Arezzo Indústria e Comércio's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 15%. Moreover, we are quite pleased to see that Arezzo Indústria e Comércio's net income grew significantly at a rate of 31% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Arezzo Indústria e Comércio's growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Arezzo Indústria e Comércio's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Arezzo Indústria e Comércio Efficiently Re-investing Its Profits?

Arezzo Indústria e Comércio's three-year median payout ratio is a pretty moderate 35%, meaning the company retains 65% of its income. So it seems that Arezzo Indústria e Comércio is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Arezzo Indústria e Comércio has been paying dividends over a period of nine 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 40%. Still, forecasts suggest that Arezzo Indústria e Comércio's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Arezzo Indústria e Comércio has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high 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. 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.