Is Cyrela Brazil Realty S.A. Empreendimentos e Participações' (BVMF:CYRE3) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Cyrela Brazil Realty Empreendimentos e Participações' (BVMF:CYRE3) stock increased significantly by 25% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Cyrela Brazil Realty Empreendimentos e Participações' ROE in this article.

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

See our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

How To 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 Cyrela Brazil Realty Empreendimentos e Participações is:

11% = R$879m ÷ R$7.9b (Based on the trailing twelve months to March 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.11 in profit.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of Cyrela Brazil Realty Empreendimentos e Participações' Earnings Growth And 11% ROE

As you can see, Cyrela Brazil Realty Empreendimentos e Participações' ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 12%. However, the exceptional 36% net income growth seen by Cyrela Brazil Realty Empreendimentos e Participações over the past five years is pretty remarkable. We reckon that there could also be other factors at play thats influencing the company's growth. Such as - high earnings retention or an efficient management in place.

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 31% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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?

The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for Cyrela Brazil Realty Empreendimentos e Participações suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Cyrela Brazil Realty Empreendimentos e Participações has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 35% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we do feel that Cyrela Brazil Realty Empreendimentos e Participações has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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.