Mitre Realty Empreendimentos e Participações S.A.'s (BVMF:MTRE3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Mitre Realty Empreendimentos e Participações (BVMF:MTRE3) has had a rough month with its share price down 5.7%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Mitre Realty Empreendimentos e Participações' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Mitre Realty Empreendimentos e Participações

How To 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 Mitre Realty Empreendimentos e Participações is:

3.2% = R$32m ÷ R$995m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.03 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. 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.

Mitre Realty Empreendimentos e Participações' Earnings Growth And 3.2% ROE

As you can see, Mitre Realty Empreendimentos e Participações' ROE looks pretty weak. Even when compared to the industry average of 5.6%, the ROE figure is pretty disappointing. Despite this, surprisingly, Mitre Realty Empreendimentos e Participações saw an exceptional 47% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Mitre Realty Empreendimentos e Participações' growth is quite high when compared to the industry average growth of 23% 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 Mitre Realty Empreendimentos e Participações fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mitre Realty Empreendimentos e Participações Efficiently Re-investing Its Profits?

The three-year median payout ratio for Mitre Realty Empreendimentos e Participações is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Mitre Realty Empreendimentos e Participações is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Along with seeing a growth in earnings, Mitre Realty Empreendimentos e Participações only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 61% over the next three years. However, Mitre Realty Empreendimentos e Participações' future ROE is expected to rise to 15% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that Mitre Realty Empreendimentos e Participações certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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