Is Irani Papel e Embalagem S.A.'s (BVMF:RANI3) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Irani Papel e Embalagem's (BVMF:RANI3) stock increased significantly by 14% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Irani Papel e Embalagem's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Irani Papel e Embalagem

How Do You 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 Irani Papel e Embalagem is:

9.5% = R$73m ÷ R$768m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.09 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. 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. 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.

Irani Papel e Embalagem's Earnings Growth And 9.5% ROE

It is quite clear that Irani Papel e Embalagem's ROE is rather low. Still, the company's ROE is higher than the average industry ROE of 7.7% so that's certainly interesting. Particularly, the substantial 26% net income growth seen by Irani Papel e Embalagem over the past five years is impressive . That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For instance, the company has a low payout ratio or is being managed efficiently

As a next step, we compared Irani Papel e Embalagem'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 8.9%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Irani Papel e Embalagem's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Irani Papel e Embalagem Using Its Retained Earnings Effectively?

Irani Papel e Embalagem's ' three-year median payout ratio is on the lower side at 4.0% implying that it is retaining a higher percentage (96%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Irani Papel e Embalagem has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 49% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Irani Papel e Embalagem's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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