Méliuz S.A.'s (BVMF:CASH3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

By
Simply Wall St
Published
September 06, 2021
BOVESPA:CASH3
Source: Shutterstock

It is hard to get excited after looking at Méliuz's (BVMF:CASH3) recent performance, when its stock has declined 46% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Méliuz's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Méliuz

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 Méliuz is:

1.4% = R$5.3m ÷ R$367m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.01 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Méliuz's Earnings Growth And 1.4% ROE

It is quite clear that Méliuz's ROE is rather low. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. In spite of this, Méliuz was able to grow its net income considerably, at a rate of 58% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Méliuz'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 10%.

past-earnings-growth
BOVESPA:CASH3 Past Earnings Growth September 6th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Méliuz's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Méliuz Making Efficient Use Of Its Profits?

Méliuz has a really low three-year median payout ratio of 23%, meaning that it has the remaining 77% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Our latest analyst data shows that the future payout ratio of the company is expected to drop to 9.3% over the next three years. As a result, the expected drop in Méliuz's payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.

Conclusion

Overall, we feel that Méliuz certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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