Is Três Tentos Agroindustrial S/A's (BVMF:TTEN3) Recent Stock Performance Tethered To Its Strong Fundamentals?

Três Tentos Agroindustrial S/A (BVMF:TTEN3) has had a great run on the share market with its stock up by a significant 18% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Três Tentos Agroindustrial S/A's 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.

Check out our latest analysis for Três Tentos Agroindustrial S/A

How To 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 Três Tentos Agroindustrial S/A is:

20% = R$796m ÷ R$3.9b (Based on the trailing twelve months to September 2024).

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$0.20 in profit.

What Is The Relationship Between ROE And 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.

A Side By Side comparison of Três Tentos Agroindustrial S/A's Earnings Growth And 20% ROE

To start with, Três Tentos Agroindustrial S/A's ROE looks acceptable. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. This probably laid the ground for Três Tentos Agroindustrial S/A's significant 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Três Tentos Agroindustrial S/A's growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

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

Is Três Tentos Agroindustrial S/A Making Efficient Use Of Its Profits?

Três Tentos Agroindustrial S/A has a really low three-year median payout ratio of 8.8%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Três Tentos Agroindustrial S/A is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 27% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 16%) over the same period.

Summary

In total, we are pretty happy with Três Tentos Agroindustrial S/A's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. 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.