Ouro Fino Saúde Animal Participações S.A.'s (BVMF:OFSA3) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Ouro Fino Saúde Animal Participações' (BVMF:OFSA3) stock is up by a considerable 17% over the past three months. 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. In this article, we decided to focus on Ouro Fino Saúde Animal Participações' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ouro Fino Saúde Animal Participações

How Do You Calculate Return On Equity?

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 Ouro Fino Saúde Animal Participações is:

15% = R$83m ÷ R$552m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Ouro Fino Saúde Animal Participações' Earnings Growth And 15% ROE

At first glance, Ouro Fino Saúde Animal Participações' ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 11%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Ouro Fino Saúde Animal Participações. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing Ouro Fino Saúde Animal Participações' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ouro Fino Saúde Animal Participações is trading on a high P/E or a low P/E, relative to its industry.

Is Ouro Fino Saúde Animal Participações Using Its Retained Earnings Effectively?

Given that Ouro Fino Saúde Animal Participações doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, we are pretty happy with Ouro Fino Saúde Animal Participações' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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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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