Camil Alimentos S.A.'s (BVMF:CAML3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Camil Alimentos (BVMF:CAML3) has had a rough three months with its share price down 13%. 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. Specifically, we decided to study Camil Alimentos' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Camil Alimentos

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 Camil Alimentos is:

15% = R$398m ÷ R$2.7b (Based on the trailing twelve months to August 2020).

The 'return' refers to a company's earnings over the last year. That means that for every R$1 worth of shareholders' equity, the company generated R$0.15 in profit.

Why Is ROE Important For Earnings Growth?

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

Camil Alimentos' Earnings Growth And 15% ROE

At first glance, Camil Alimentos' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 15%. Moreover, we are quite pleased to see that Camil Alimentos' net income grew significantly at a rate of 22% over the last five years. 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 Camil Alimentos' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Camil Alimentos''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Camil Alimentos Efficiently Re-investing Its Profits?

Camil Alimentos has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Camil Alimentos is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Camil Alimentos is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. 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 23%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 14%.

Summary

In total, it does look like Camil Alimentos has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. 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. 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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