Do Its Financials Have Any Role To Play In Driving BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' (BVMF:AGRO3) Stock Up Recently?

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (BVMF:AGRO3) has had a great run on the share market with its stock up by a significant 17% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas

How Do You Calculate Return On Equity?

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 BrasilAgro - Companhia Brasileira de Propriedades Agrícolas is:

13% = R$155m ÷ R$1.2b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.13 in profit.

Why Is ROE Important For Earnings Growth?

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

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' Earnings Growth And 13% ROE

On the face of it, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' ROE is not much to talk about. However, its ROE is similar to the industry average of 15%, so we won't completely dismiss the company. Even so, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has shown a fairly decent growth in its net income which grew at a rate of 9.2%. 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. Such as - high earnings retention or an efficient management in place.

We then compared BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 19% in the same period, which is a bit concerning.

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. Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas Using Its Retained Earnings Effectively?

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas.

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This article by Simply Wall St is general in nature. 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.
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