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 27%. 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 Mitre Realty Empreendimentos e Participações' 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.

View our latest analysis for Mitre Realty Empreendimentos e Participações

How Is ROE Calculated?

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 yearly profit. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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

It is quite clear that Mitre Realty Empreendimentos e Participações' ROE is rather low. Not just that, even compared to the industry average of 6.0%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Mitre Realty Empreendimentos e Participações saw an exceptional 47% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Mitre Realty Empreendimentos e Participações' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 25% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mitre Realty Empreendimentos e Participações''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mitre Realty Empreendimentos e Participações Making Efficient Use Of Its Profits?

Mitre Realty Empreendimentos e Participações' three-year median payout ratio is a pretty moderate 35%, meaning the company retains 65% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Mitre Realty Empreendimentos e Participações is reinvesting its earnings efficiently.

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 52% over the next three years. However, Mitre Realty Empreendimentos e Participações' future ROE is expected to rise to 22% 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.

Summary

On the whole, we do feel that Mitre Realty Empreendimentos e Participações has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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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