Is Porto Seguro S.A.'s (BVMF:PSSA3) Recent Performance Tethered To Its Attractive Financial Prospects?

Most readers would already know that Porto Seguro's (BVMF:PSSA3) stock increased by 3.1% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Porto Seguro's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Porto Seguro

How To Calculate Return On Equity?

Return on equity 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 Porto Seguro is:

19% = R$1.7b ÷ R$8.9b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Porto Seguro's Earnings Growth And 19% ROE

To begin with, Porto Seguro seems to have a respectable ROE. Even when compared to the industry average of 19% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Porto Seguro.

Next, on comparing Porto Seguro's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Porto Seguro fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Porto Seguro Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 50% (implying that the company retains 50% of its profits), it seems that Porto Seguro is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Porto Seguro has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. Accordingly, forecasts suggest that Porto Seguro's future ROE will be 16% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Porto Seguro'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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