Declining Stock and Solid Fundamentals: Is The Market Wrong About Plano & Plano Desenvolvimento Imobiliário S.A. (BVMF:PLPL3)?

With its stock down 20% over the past month, it is easy to disregard Plano & Plano Desenvolvimento Imobiliário (BVMF:PLPL3). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Plano & Plano Desenvolvimento Imobiliário's 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Plano & Plano Desenvolvimento Imobiliário

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Plano & Plano Desenvolvimento Imobiliário is:

43% = R$277m ÷ R$646m (Based on the trailing twelve months to December 2023).

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$0.43.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Plano & Plano Desenvolvimento Imobiliário's Earnings Growth And 43% ROE

Firstly, we acknowledge that Plano & Plano Desenvolvimento Imobiliário has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. So, the substantial 20% net income growth seen by Plano & Plano Desenvolvimento Imobiliário over the past five years isn't overly surprising.

As a next step, we compared Plano & Plano Desenvolvimento Imobiliário's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Plano & Plano Desenvolvimento Imobiliário is trading on a high P/E or a low P/E, relative to its industry.

Is Plano & Plano Desenvolvimento Imobiliário Efficiently Re-investing Its Profits?

Plano & Plano Desenvolvimento Imobiliário has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. So it seems that Plano & Plano Desenvolvimento Imobiliário is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

While Plano & Plano Desenvolvimento Imobiliário has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 80% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Plano & Plano Desenvolvimento Imobiliário's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.