Terra Santa Propriedades Agrícolas S.A. (BVMF:LAND3) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Terra Santa Propriedades Agrícolas' (BVMF:LAND3) stock is up by a considerable 17% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Terra Santa Propriedades Agrícolas' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Terra Santa Propriedades Agrícolas

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Terra Santa Propriedades Agrícolas is:

3.7% = R$27m ÷ R$728m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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$0.04.

Why Is ROE Important For Earnings Growth?

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

Terra Santa Propriedades Agrícolas' Earnings Growth And 3.7% ROE

As you can see, Terra Santa Propriedades Agrícolas' ROE looks pretty weak. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. However, the moderate 20% net income growth seen by Terra Santa Propriedades Agrícolas over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings 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 Terra Santa Propriedades Agrícolas' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Terra Santa Propriedades Agrícolas is trading on a high P/E or a low P/E, relative to its industry.

Is Terra Santa Propriedades Agrícolas Making Efficient Use Of Its Profits?

Terra Santa Propriedades Agrícolas has a significant three-year median payout ratio of 91%, meaning that it is left with only 8.7% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Terra Santa Propriedades Agrícolas 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.

Conclusion

Overall, we have mixed feelings about Terra Santa Propriedades Agrícolas. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Terra Santa Propriedades Agrícolas and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.