Cyrela Brazil Realty S.A. Empreendimentos e Participações' (BVMF:CYRE3) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Cyrela Brazil Realty Empreendimentos e Participações' (BVMF:CYRE3) stock increased significantly by 19% over the past three months. 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 Cyrela Brazil Realty Empreendimentos e Participações' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

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 Cyrela Brazil Realty Empreendimentos e Participações is:

15% = R$1.4b ÷ R$9.2b (Based on the trailing twelve months to June 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$0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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 Cyrela Brazil Realty Empreendimentos e Participações' Earnings Growth And 15% ROE

When you first look at it, Cyrela Brazil Realty Empreendimentos e Participações' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 15%, we may spare it some thought. On the other hand, Cyrela Brazil Realty Empreendimentos e Participações reported a moderate 7.3% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Cyrela Brazil Realty Empreendimentos e Participações' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 22%, meaning that the company retains the remaining 78% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Cyrela Brazil Realty Empreendimentos e 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 45% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we do feel that Cyrela Brazil Realty Empreendimentos e Participações has some positive attributes. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.