Has GPC Participações S.A.'s (BVMF:GPCP3) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

GPC Participações''s (BVMF:GPCP3) stock is up by a considerable 50% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to GPC Participações' 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 GPC Participações

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 GPC Participações is:

14% = R$30m ÷ R$214m (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.14.

Why Is ROE Important For Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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.

GPC Participações' Earnings Growth And 14% ROE

At first glance, GPC Participações' ROE doesn't look very promising. However, its ROE is similar to the industry average of 14%, so we won't completely dismiss the company. Particularly, the exceptional 36% net income growth seen by GPC Participações over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between GPC Participações' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 36% in the same period.

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. If you're wondering about GPC Participações''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GPC Participações Using Its Retained Earnings Effectively?

GPC Participações' three-year median payout ratio to shareholders is 7.3%, which is quite low. This implies that the company is retaining 93% of its profits. So it looks like GPC Participações is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, GPC Participações only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

On the whole, we do feel that GPC Participações 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 4 risks we have identified for GPC Participações.

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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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