Cyrela Brazil Realty S.A. Empreendimentos e Participações' (BVMF:CYRE3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 18% over the past three months, it is easy to disregard Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Cyrela Brazil Realty Empreendimentos e Participações' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

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 Cyrela Brazil Realty Empreendimentos e Participações is:

14% = R$1.2b ÷ R$8.8b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.14 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Cyrela Brazil Realty Empreendimentos e Participações' Earnings Growth And 14% ROE

At first glance, Cyrela Brazil Realty Empreendimentos e Participações' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 14%. Even so, Cyrela Brazil Realty Empreendimentos e Participações has shown a fairly decent growth in its net income which grew at a rate of 12%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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.

We then performed a comparison between Cyrela Brazil Realty Empreendimentos e 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 5-year 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). This then helps them determine if the stock is placed for a bright or bleak future. What is CYRE3 worth today? The intrinsic value infographic in our free research report helps visualize whether CYRE3 is currently mispriced by the market.

Is Cyrela Brazil Realty Empreendimentos e Participações Using Its Retained Earnings Effectively?

Cyrela Brazil Realty Empreendimentos e Participações has a low three-year median payout ratio of 24%, meaning that the company retains the remaining 76% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Cyrela Brazil Realty Empreendimentos e Participações has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 40% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, it does look like Cyrela Brazil Realty Empreendimentos e Participações 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, 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. 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.