SLC Agrícola S.A.'s (BVMF:SLCE3) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 4.4% over the past month, it is easy to disregard SLC Agrícola (BVMF:SLCE3). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for SLC Agrícola

How Is ROE Calculated?

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:

14% = R$405m ÷ R$2.9b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.14.

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. 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.

SLC Agrícola's Earnings Growth And 14% ROE

At first glance, SLC Agrícola's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 15%, we may spare it some thought. Moreover, we are quite pleased to see that SLC Agrícola's net income grew significantly at a rate of 28% 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. Such as - high earnings retention or an efficient management in place.

We then compared SLC Agrícola's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% 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. 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 Efficiently Re-investing Its Profits?

The three-year median payout ratio for SLC Agrícola is 46%, which is moderately low. The company is retaining the remaining 54%. 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 47%. As a result, SLC Agrícola's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.

Summary

On the whole, we do feel that SLC Agrícola has some positive attributes. 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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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