MRV Engenharia e Participações S.A.'s (BVMF:MRVE3) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

MRV Engenharia e Participações (BVMF:MRVE3) has had a great run on the share market with its stock up by a significant 12% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study MRV Engenharia 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for MRV Engenharia 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 MRV Engenharia e Participações is:

9.6% = R$571m ÷ R$6.0b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. 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?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

MRV Engenharia e Participações' Earnings Growth And 9.6% ROE

It is hard to argue that MRV Engenharia e Participações' ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 12%. Thus, the low ROE certainly provides some context to MRV Engenharia e Participações' very little net income growth of 3.5% seen over the past five years.

Next, on comparing with the industry net income growth, we found that MRV Engenharia e Participações' reported growth was lower than the industry growth of 11% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is MRV Engenharia e Participações fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MRV Engenharia e Participações Making Efficient Use Of Its Profits?

A low three-year median payout ratio of 23% (implying that the company retains the remaining 77% of its income) suggests that MRV Engenharia e Participações is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 63% over the next three years. However, MRV Engenharia e Participações' future ROE is expected to rise to 13% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we have mixed feelings about MRV Engenharia e Participações. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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