Dimed S.A. Distribuidora de Medicamentos' (BVMF:PNVL3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 15% over the past three months, it is easy to disregard Dimed Distribuidora de Medicamentos (BVMF:PNVL3). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Dimed Distribuidora de Medicamentos' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Dimed Distribuidora de Medicamentos

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 Dimed Distribuidora de Medicamentos is:

8.7% = R$104m ÷ R$1.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Dimed Distribuidora de Medicamentos' Earnings Growth And 8.7% ROE

It is hard to argue that Dimed Distribuidora de Medicamentos' ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 8.7%. As a result, Dimed Distribuidora de Medicamentos' decent 8.2% net income growth seen over the past five years bodes well with us. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Dimed Distribuidora de Medicamentos' 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 8.2% in the same period.

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. 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 Dimed Distribuidora de Medicamentos is trading on a high P/E or a low P/E, relative to its industry.

Is Dimed Distribuidora de Medicamentos Using Its Retained Earnings Effectively?

Dimed Distribuidora de Medicamentos has a three-year median payout ratio of 33%, which implies that it retains the remaining 67% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Dimed Distribuidora de Medicamentos is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 41% over the next three years. Regardless, the future ROE for Dimed Distribuidora de Medicamentos is speculated to rise to 14% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, it does look like Dimed Distribuidora de Medicamentos has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.