Cyrela Brazil Realty S.A. Empreendimentos e Participações' (BVMF:CYRE3) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3) has had a great run on the share market with its stock up by a significant 33% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Cyrela Brazil Realty Empreendimentos e 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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:

17% = R$1.6b ÷ R$9.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every R$1 worth of shareholders' equity, the company generated R$0.17 in profit.

See our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

What Is The Relationship Between ROE And 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 17% 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 16%, we may spare it some thought. Having said that, Cyrela Brazil Realty Empreendimentos e Participações has shown a meagre net income growth of 4.6% over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing Cyrela Brazil Realty Empreendimentos e Participações' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.3% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Cyrela Brazil Realty Empreendimentos e Participações is trading on a high P/E or a low P/E, relative to its industry.

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

Cyrela Brazil Realty Empreendimentos e Participações' low three-year median payout ratio of 24% (or a retention ratio of 76%) should mean that the company is retaining most of its earnings to fuel its growth. This should be reflected in its earnings growth number, but that's not the case. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Cyrela Brazil Realty Empreendimentos e Participações has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 41% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we feel that Cyrela Brazil Realty Empreendimentos e Participações certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.