Lojas Renner S.A.'s (BVMF:LREN3) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Lojas Renner's (BVMF:LREN3) stock is up by a considerable 13% over the past month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Lojas Renner's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Lojas Renner is:

11% = R$1.2b ÷ R$11b (Based on the trailing twelve months to December 2024).

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$0.11 in profit.

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. 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 11% ROE

As you can see, Lojas Renner's ROE looks pretty weak. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Lojas Renner's very little net income growth of 2.4% over the past five years.

Next, on comparing with the industry net income growth, we found that Lojas Renner's reported growth was lower than the industry growth of 5.1% over the last few years, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Lojas Renner fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lojas Renner Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 54% (or a retention ratio of 46%), most of Lojas Renner's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Lojas Renner has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. However, Lojas Renner's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

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.