Is Weakness In Smartfit Escola de Ginástica e Dança S.A. (BVMF:SMFT3) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Smartfit Escola de Ginástica e Dança (BVMF:SMFT3) has had a rough three months with its share price down 9.8%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Smartfit Escola de Ginástica e Dança's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Smartfit Escola de Ginástica e Dança

How Is ROE Calculated?

ROE 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 Smartfit Escola de Ginástica e Dança is:

20% = R$1.1b ÷ R$5.3b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.20.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Smartfit Escola de Ginástica e Dança's Earnings Growth And 20% ROE

To begin with, Smartfit Escola de Ginástica e Dança seems to have a respectable ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This probably goes some way in explaining Smartfit Escola de Ginástica e Dança's significant 38% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Smartfit Escola de Ginástica e Dança's growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is SMFT3 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Smartfit Escola de Ginástica e Dança Using Its Retained Earnings Effectively?

Smartfit Escola de Ginástica e Dança has a three-year median payout ratio of 49% (where it is retaining 51% of its income) which is not too low or not too high. So it seems that Smartfit Escola de Ginástica e Dança is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Along with seeing a growth in earnings, Smartfit Escola de Ginástica e Dança only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 22% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we are quite pleased with Smartfit Escola de Ginástica e Dança's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com