Can Plano & Plano Desenvolvimento Imobiliário S.A.'s (BVMF:PLPL3) ROE Continue To Surpass The Industry Average?

Published
July 01, 2022
BOVESPA:PLPL3
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While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, we'll use ROE to better understand Plano & Plano Desenvolvimento Imobiliário S.A. (BVMF:PLPL3).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Plano & Plano Desenvolvimento Imobiliário

How Is ROE Calculated?

Return on equity 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 Plano & Plano Desenvolvimento Imobiliário is:

32% = R$107m ÷ R$332m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.32 in profit.

Does Plano & Plano Desenvolvimento Imobiliário Have A Good ROE?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, Plano & Plano Desenvolvimento Imobiliário has a better ROE than the average (13%) in the Consumer Durables industry.

roe
BOVESPA:PLPL3 Return on Equity July 1st 2022

That's what we like to see. Bear in mind, a high ROE doesn't always mean superior financial performance. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. Our risks dashboardshould have the 5 risks we have identified for Plano & Plano Desenvolvimento Imobiliário.

How Does Debt Impact Return On Equity?

Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve the returns, but will not change the equity. That will make the ROE look better than if no debt was used.

Plano & Plano Desenvolvimento Imobiliário's Debt And Its 32% ROE

Plano & Plano Desenvolvimento Imobiliário does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.24. While no doubt that its ROE is impressive, we would have been even more impressed had the company achieved this with lower debt. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Summary

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Plano & Plano Desenvolvimento Imobiliário may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

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