Ultrapar Participações S.A.'s (BVMF:UGPA3) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Ultrapar Participações' (BVMF:UGPA3) stock is up by 7.7% 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 Ultrapar Participações' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

We've discovered 3 warning signs about Ultrapar Participações. View them for free.

How Is ROE Calculated?

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 Ultrapar Participações is:

16% = R$2.5b ÷ R$16b (Based on the trailing twelve months to December 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$0.16 in profit.

View our latest analysis for Ultrapar Participações

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Ultrapar Participações' Earnings Growth And 16% ROE

When you first look at it, Ultrapar Participações' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 17%, we may spare it some thought. Looking at Ultrapar Participações' exceptional 43% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Ultrapar Participações' growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.

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. 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 Efficiently Re-investing Its Profits?

Ultrapar Participações' three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. 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.

Additionally, Ultrapar Participações 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 49% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, it does look like Ultrapar Participações has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.