Unicasa Indústria de Móveis S.A.'s (BVMF:UCAS3) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Unicasa Indústria de Móveis' (BVMF:UCAS3) stock is up by a considerable 12% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Unicasa Indústria de Móveis' ROE.

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 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 Unicasa Indústria de Móveis

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 Unicasa Indústria de Móveis is:

7.7% = R$12m ÷ R$154m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Unicasa Indústria de Móveis' Earnings Growth And 7.7% ROE

It is hard to argue that Unicasa Indústria de Móveis' ROE is much good in and of itself. Even compared to the average industry ROE of 14%, the company's ROE is quite dismal. In spite of this, Unicasa Indústria de Móveis was able to grow its net income considerably, at a rate of 32% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Unicasa Indústria de Móveis' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Unicasa Indústria de Móveis''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Unicasa Indústria de Móveis Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 125% for Unicasa Indústria de Móveis suggests that the company is paying its shareholders more than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. You can see the 2 risks we have identified for Unicasa Indústria de Móveis by visiting our risks dashboard for free on our platform here.

Besides, Unicasa Indústria de Móveis has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we're a bit ambivalent about Unicasa Indústria de Móveis' performance. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Unicasa Indústria de Móveis and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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