Can Mixed Fundamentals Have A Negative Impact on M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) Current Share Price Momentum?

M. Dias Branco Indústria e Comércio de Alimentos' (BVMF:MDIA3) stock is up by a considerable 10% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on M. Dias Branco Indústria e Comércio de Alimentos' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 M. Dias Branco Indústria e Comércio de Alimentos is:

7.0% = R$560m ÷ R$8.0b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.07 in profit.

See our latest analysis for M. Dias Branco Indústria e Comércio de Alimentos

Why Is ROE Important For Earnings Growth?

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

M. Dias Branco Indústria e Comércio de Alimentos' Earnings Growth And 7.0% ROE

It is quite clear that M. Dias Branco Indústria e Comércio de Alimentos' ROE is rather low. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. Accordingly, M. Dias Branco Indústria e Comércio de Alimentos' low net income growth of 2.5% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared M. Dias Branco Indústria e Comércio de Alimentos' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 3.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MDIA3 worth today? The intrinsic value infographic in our free research report helps visualize whether MDIA3 is currently mispriced by the market.

Is M. Dias Branco Indústria e Comércio de Alimentos Efficiently Re-investing Its Profits?

A low three-year median payout ratio of 14% (implying that the company retains the remaining 86% of its income) suggests that M. Dias Branco Indústria e Comércio de Alimentos is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, M. Dias Branco Indústria e Comércio de Alimentos has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 53% over the next three years. However, M. Dias Branco Indústria e Comércio de Alimentos' future ROE is expected to rise to 11% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

On the whole, we feel that the performance shown by M. Dias Branco Indústria e Comércio de Alimentos can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.