Porto Seguro S.A.'s (BVMF:PSSA3) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
January 25, 2022
BOVESPA:PSSA3
Source: Shutterstock

With its stock down 21% over the past three months, it is easy to disregard Porto Seguro (BVMF:PSSA3). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Porto Seguro's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Porto Seguro

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 Porto Seguro is:

16% = R$1.4b ÷ R$9.1b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.16 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Porto Seguro's Earnings Growth And 16% ROE

At first glance, Porto Seguro's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 18%, we may spare it some thought. Even so, Porto Seguro has shown a fairly decent growth in its net income which grew at a rate of 13%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Porto Seguro's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.9%.

past-earnings-growth
BOVESPA:PSSA3 Past Earnings Growth January 25th 2022

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for PSSA3? You can find out in our latest intrinsic value infographic research report.

Is Porto Seguro Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we do feel that Porto Seguro has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.