Lojas Renner S.A.'s (BVMF:LREN3) Dismal Stock Performance Reflects Weak Fundamentals

Lojas Renner (BVMF:LREN3) has had a rough three months with its share price down 14%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Lojas Renner's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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:

13% = R$1.4b ÷ R$10b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.13.

View our latest analysis for Lojas Renner

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Lojas Renner's Earnings Growth And 13% ROE

As you can see, Lojas Renner's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 16%. Accordingly, Lojas Renner's low net income growth of 4.9% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Lojas Renner's reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for LREN3? You can find out in our latest intrinsic value infographic research report.

Is Lojas Renner Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 54% (that is, the company retains only 46% of its income) over the past three years for Lojas Renner suggests that the company's earnings growth was lower 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 51%. Accordingly, forecasts suggest that Lojas Renner's future ROE will be 16% which is again, similar to the current ROE.

Conclusion

On the whole, Lojas Renner's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.