IRB-Brasil Resseguros S.A.'s (BVMF:IRBR3) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

IRB-Brasil Resseguros' (BVMF:IRBR3) stock is up by a considerable 63% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to IRB-Brasil Resseguros' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for IRB-Brasil Resseguros

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for IRB-Brasil Resseguros is:

8.0% = R$369m ÷ R$4.6b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.08 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

IRB-Brasil Resseguros' Earnings Growth And 8.0% ROE

As you can see, IRB-Brasil Resseguros' ROE looks pretty weak. Not just that, even compared to the industry average of 24%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 22% seen by IRB-Brasil Resseguros was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

However, when we compared IRB-Brasil Resseguros' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 9.2% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is IRB-Brasil Resseguros fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is IRB-Brasil Resseguros Using Its Retained Earnings Effectively?

Because IRB-Brasil Resseguros doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

Overall, we have mixed feelings about IRB-Brasil Resseguros. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.