Is Weakness In Três Tentos Agroindustrial S/A (BVMF:TTEN3) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 13% over the past three months, it is easy to disregard Três Tentos Agroindustrial S/A (BVMF:TTEN3). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Três Tentos Agroindustrial S/A's ROE.

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.

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How To Calculate Return On Equity?

The formula for ROE is:

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:

19% = R$792m ÷ R$4.2b (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.19 in profit.

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

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 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.

A Side By Side comparison of Três Tentos Agroindustrial S/A's Earnings Growth And 19% ROE

When you first look at it, Três Tentos Agroindustrial S/A's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 15%, is definitely interesting. Even more so after seeing Três Tentos Agroindustrial S/A's exceptional 22% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Três Tentos Agroindustrial S/A'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 3.5% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for TTEN3? You can find out in our latest intrinsic value infographic research report.

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

Três Tentos Agroindustrial S/A's three-year median payout ratio to shareholders is 9.2%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Três Tentos Agroindustrial S/A is reinvesting profits heavily to grow its business, which shows in its earnings growth.

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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 33% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Três Tentos Agroindustrial S/A's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.