Construtora Tenda S.A.'s (BVMF:TEND3) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 5.2% over the past week, it is easy to disregard Construtora Tenda (BVMF:TEND3). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Construtora Tenda's ROE today.

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.

View our latest analysis for Construtora Tenda

How To Calculate Return On Equity?

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 Construtora Tenda is:

14% = R$205m ÷ R$1.5b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.14 in profit.

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. 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.

Construtora Tenda's Earnings Growth And 14% ROE

On the face of it, Construtora Tenda's ROE is not much to talk about. However, its ROE is similar to the industry average of 14%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Construtora Tenda's net income grew significantly at a rate of 40% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Construtora Tenda's growth is quite high when compared to the industry average growth of 11% in the same period, which is great 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. If you're wondering about Construtora Tenda's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Construtora Tenda Efficiently Re-investing Its Profits?

Construtora Tenda has a really low three-year median payout ratio of 5.1%, meaning that it has the remaining 95% left over to reinvest into its business. So it looks like Construtora Tenda is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Construtora Tenda has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 62% over the next three years. However, Construtora Tenda's future ROE is expected to rise to 18% 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.

Summary

In total, it does look like Construtora Tenda has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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