LPS Brasil - Consultoria de Imóveis S.A.'s (BVMF:LPSB3) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that LPS Brasil - Consultoria de Imóveis' (BVMF:LPSB3) stock increased significantly by 12% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to LPS Brasil - Consultoria de Imóveis' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for LPS Brasil - Consultoria de Imóveis

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for LPS Brasil - Consultoria de Imóveis is:

30% = R$56m ÷ R$185m (Based on the trailing twelve months to March 2022).

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$0.30 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of LPS Brasil - Consultoria de Imóveis' Earnings Growth And 30% ROE

Firstly, we acknowledge that LPS Brasil - Consultoria de Imóveis has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.5% which is quite remarkable. So, the substantial 61% net income growth seen by LPS Brasil - Consultoria de Imóveis over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that LPS Brasil - Consultoria de Imóveis' growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is LPS Brasil - Consultoria de Imóveis fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is LPS Brasil - Consultoria de Imóveis Using Its Retained Earnings Effectively?

LPS Brasil - Consultoria de Imóveis' ' three-year median payout ratio is on the lower side at 24% implying that it is retaining a higher percentage (76%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, LPS Brasil - Consultoria de Imóveis is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that LPS Brasil - Consultoria de Imóveis' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 4 risks we have identified for LPS Brasil - Consultoria de Imóveis by visiting our risks dashboard for free on our platform here.

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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.