Multiplan Empreendimentos Imobiliários S.A.'s (BVMF:MULT3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Multiplan Empreendimentos Imobiliários (BVMF:MULT3) has had a rough three months with its share price down 5.9%. 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 Multiplan Empreendimentos Imobiliários' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Multiplan Empreendimentos Imobiliários

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 Multiplan Empreendimentos Imobiliários is:

15% = R$964m ÷ R$6.2b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. That means that for every R$1 worth of shareholders' equity, the company generated R$0.15 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 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.

Multiplan Empreendimentos Imobiliários' Earnings Growth And 15% ROE

On the face of it, Multiplan Empreendimentos Imobiliários' ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 5.9% doesn't go unnoticed by us. This certainly adds some context to Multiplan Empreendimentos Imobiliários' moderate 19% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Multiplan Empreendimentos Imobiliários' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 25% in the same period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Multiplan Empreendimentos Imobiliários''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Multiplan Empreendimentos Imobiliários Making Efficient Use Of Its Profits?

Multiplan Empreendimentos Imobiliários has a significant three-year median payout ratio of 55%, meaning that it is left with only 45% 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.

Additionally, Multiplan Empreendimentos Imobiliários has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 35% over the next three years. However, Multiplan Empreendimentos Imobiliários' future ROE is expected to decline to 9.6% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

Overall, we feel that Multiplan Empreendimentos Imobiliários certainly does have some positive factors to consider. True, the company has posted a respectable growth in earnings. However, the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paying out less dividends. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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