Does The Market Have A Low Tolerance For Lojas Renner S.A.'s (BVMF:LREN3) Mixed Fundamentals?

It is hard to get excited after looking at Lojas Renner's (BVMF:LREN3) recent performance, when its stock has declined 13% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Lojas Renner's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Lojas Renner

How To Calculate Return On Equity?

Return on equity 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 Lojas Renner is:

12% = R$1.2b ÷ R$10b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.12.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Lojas Renner's Earnings Growth And 12% ROE

It is hard to argue that Lojas Renner's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 12%. The flat earnings by Lojas Renner over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Lojas Renner's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 1.7% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Lojas Renner's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lojas Renner Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 60% (meaning, the company retains only 40% of profits) for Lojas Renner suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Lojas Renner has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 53%. Regardless, the future ROE for Lojas Renner is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that the performance shown by Lojas Renner can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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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.