Declining Stock and Decent Financials: Is The Market Wrong About Ultrapar Participações S.A. (BVMF:UGPA3)?

It is hard to get excited after looking at Ultrapar Participações' (BVMF:UGPA3) recent performance, when its stock has declined 22% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Ultrapar Participações' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Ultrapar Participações

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 Ultrapar Participações is:

18% = R$2.8b ÷ R$15b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.18 in profit.

Why Is ROE Important For 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 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.

Ultrapar Participações' Earnings Growth And 18% ROE

When you first look at it, Ultrapar Participações' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 15%. Particularly, the exceptional 40% net income growth seen by Ultrapar Participações over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Ultrapar Participações' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 39% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. What is UGPA3 worth today? The intrinsic value infographic in our free research report helps visualize whether UGPA3 is currently mispriced by the market.

Is Ultrapar Participações Making Efficient Use Of Its Profits?

Ultrapar Participações has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. So it seems that Ultrapar Participações is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Ultrapar Participações 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 19%.

Summary

In total, it does look like Ultrapar Participações has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.