Petrobras Distribuidora S.A.'s (BVMF:BRDT3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Petrobras Distribuidora (BVMF:BRDT3) has had a rough week with its share price down 4.7%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Petrobras Distribuidora's ROE today.

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.

See our latest analysis for Petrobras Distribuidora

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 Petrobras Distribuidora is:

8.9% = R$853m ÷ R$9.6b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax 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$0.09 in profit.

Why Is ROE Important For Earnings Growth?

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

Petrobras Distribuidora's Earnings Growth And 8.9% ROE

It is hard to argue that Petrobras Distribuidora's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 9.4% either. However, the exceptional 43% net income growth seen by Petrobras Distribuidora over the past five years is pretty remarkable. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Petrobras Distribuidora's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 39% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Petrobras Distribuidora fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Petrobras Distribuidora Making Efficient Use Of Its Profits?

Petrobras Distribuidora's significant three-year median payout ratio of 83% (where it is retaining only 17% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Petrobras Distribuidora has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 111% over the next three years. Still, forecasts suggest that Petrobras Distribuidora's future ROE will rise to 19% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that Petrobras Distribuidora certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

When trading Petrobras Distribuidora or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.