Is Instituto Hermes Pardini S.A.'s (BVMF:PARD3) Recent Performance Tethered To Its Attractive Financial Prospects?

Most readers would already know that Instituto Hermes Pardini's (BVMF:PARD3) stock increased by 2.0% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Instituto Hermes Pardini'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.

View our latest analysis for Instituto Hermes Pardini

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 Instituto Hermes Pardini is:

18% = R$127m ÷ R$712m (Based on the trailing twelve months to September 2020).

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$0.18 in profit.

Why Is ROE Important For 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 Instituto Hermes Pardini's Earnings Growth And 18% ROE

To begin with, Instituto Hermes Pardini seems to have a respectable ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This probably laid the ground for Instituto Hermes Pardini's moderate 9.3% net income growth seen over the past five years.

As a next step, we compared Instituto Hermes Pardini'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 9.6% 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Instituto Hermes Pardini's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Instituto Hermes Pardini Making Efficient Use Of Its Profits?

Instituto Hermes Pardini has a healthy combination of a moderate three-year median payout ratio of 26% (or a retention ratio of 74%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Instituto Hermes Pardini is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 23%. Accordingly, forecasts suggest that Instituto Hermes Pardini's future ROE will be 21% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Instituto Hermes Pardini's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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