Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) Stock Is Going Strong: Is the Market Following Fundamentals?

Smartfit Escola de Ginástica e Dança (BVMF:SMFT3) has had a great run on the share market with its stock up by a significant 11% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Smartfit Escola de Ginástica e Dança's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Smartfit Escola de Ginástica e Dança

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 Smartfit Escola de Ginástica e Dança is:

17% = R$912m ÷ R$5.3b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Smartfit Escola de Ginástica e Dança's Earnings Growth And 17% ROE

At first glance, Smartfit Escola de Ginástica e Dança's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 10% which we definitely can't overlook. Especially when you consider Smartfit Escola de Ginástica e Dança's exceptional 56% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared Smartfit Escola de Ginástica e Dança's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 32% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Smartfit Escola de Ginástica e Dança's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

Smartfit Escola de Ginástica e Dança's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Smartfit Escola de Ginástica e Dança is reinvesting its earnings efficiently.

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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 4.9% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Summary

Overall, we are quite pleased with Smartfit Escola de Ginástica e Dança's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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. 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.