Should Weakness in Ambev S.A.'s (BVMF:ABEV3) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Ambev (BVMF:ABEV3) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Ambev's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Ambev is:

16% = R$15b ÷ R$93b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.16.

Check out our latest analysis for Ambev

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Ambev's Earnings Growth And 16% ROE

On the face of it, Ambev's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 11% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 5.7% seen over the past five years by Ambev. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Ambev's reported growth was lower than the industry growth of 7.9% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for ABEV3? You can find out in our latest intrinsic value infographic research report.

Is Ambev Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Ambev suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Ambev has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 83%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 18%.

Summary

On the whole, we do feel that Ambev has some positive attributes. True, the company has posted a respectable growth in earnings. However, the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paying out less dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.