Do Fundamentals Have Any Role To Play In Driving Raia Drogasil S.A.'s (BVMF:RADL3) Stock Up Recently?

By
Simply Wall St
Published
April 10, 2022
BOVESPA:RADL3
Source: Shutterstock

Raia Drogasil's (BVMF:RADL3) stock up by 6.6% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Raia Drogasil's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Raia Drogasil

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Raia Drogasil is:

16% = R$764m ÷ R$4.7b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.16 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. 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 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.

Raia Drogasil's Earnings Growth And 16% ROE

On the face of it, Raia Drogasil's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 9.9% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 9.2% seen over the past five years by Raia Drogasil. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Raia Drogasil's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.

past-earnings-growth
BOVESPA:RADL3 Past Earnings Growth April 10th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Raia Drogasil fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Raia Drogasil Making Efficient Use Of Its Profits?

Raia Drogasil has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Raia Drogasil has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 44% over the next three years. However, Raia Drogasil's future ROE is expected to rise to 22% 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

On the whole, we do feel that Raia Drogasil has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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