Declining Stock and Solid Fundamentals: Is The Market Wrong About Wiz Soluções e Corretagem de Seguros S.A. (BVMF:WIZS3)?

With its stock down 25% over the past three months, it is easy to disregard Wiz Soluções e Corretagem de Seguros (BVMF:WIZS3). 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 Wiz Soluções e Corretagem de Seguros' 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.

Check out our latest analysis for Wiz Soluções e Corretagem de Seguros

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 Wiz Soluções e Corretagem de Seguros is:

67% = R$200m ÷ R$298m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.67 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. 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.

A Side By Side comparison of Wiz Soluções e Corretagem de Seguros' Earnings Growth And 67% ROE

To begin with, Wiz Soluções e Corretagem de Seguros has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 22% the company's ROE is quite impressive. Probably as a result of this, Wiz Soluções e Corretagem de Seguros was able to see a decent net income growth of 12% over the last five years.

We then performed a comparison between Wiz Soluções e Corretagem de Seguros' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Wiz Soluções e Corretagem de Seguros''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wiz Soluções e Corretagem de Seguros Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 69% (or a retention ratio of 31%) for Wiz Soluções e Corretagem de Seguros suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Wiz Soluções e Corretagem de Seguros has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 82% of its profits over the next three years.

Conclusion

On the whole, we feel that Wiz Soluções e Corretagem de Seguros' performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink 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. 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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