Is SLC Agrícola S.A.'s (BVMF:SLCE3) Stock's Recent Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
July 01, 2021
BOVESPA:SLCE3
Source: Shutterstock

SLC Agrícola's (BVMF:SLCE3) stock is up by 9.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to SLC Agrícola's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for SLC Agrícola

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 SLC Agrícola is:

22% = R$731m ÷ R$3.4b (Based on the trailing twelve months to March 2021).

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$0.22 in profit.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of SLC Agrícola's Earnings Growth And 22% ROE

At first glance, SLC Agrícola seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 19%. This probably goes some way in explaining SLC Agrícola's significant 29% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared SLC Agrícola's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 26% in the same period.

past-earnings-growth
BOVESPA:SLCE3 Past Earnings Growth July 1st 2021

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SLC Agrícola's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SLC Agrícola Making Efficient Use Of Its Profits?

SLC Agrícola's three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. By the looks of it, the dividend is well covered and SLC Agrícola is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, SLC Agrícola is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 41%. Still, forecasts suggest that SLC Agrícola's future ROE will rise to 28% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with SLC Agrícola's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. 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. 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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