Is MRV Engenharia e Participações S.A.'s (BVMF:MRVE3) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at MRV Engenharia e Participações' (BVMF:MRVE3) recent performance, when its stock has declined 18% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study MRV Engenharia 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for MRV Engenharia e Participações

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for MRV Engenharia e Participações is:

10% = R$621m ÷ R$6.0b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.10.

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. 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 MRV Engenharia e Participações' Earnings Growth And 10% ROE

It is quite clear that MRV Engenharia e Participações' ROE is rather low. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. Therefore, MRV Engenharia e Participações' flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared MRV Engenharia e Participações' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same period, which is a bit concerning.

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

Is MRV Engenharia e Participações Using Its Retained Earnings Effectively?

MRV Engenharia e Participações' low three-year median payout ratio of 23%, (meaning the company retains77% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, MRV Engenharia e Participações has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 84% over the next three years. Still, forecasts suggest that MRV Engenharia e Participações' future ROE will rise to 16% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we're a bit ambivalent about MRV Engenharia e Participações' performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. 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.
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