Could The Market Be Wrong About Intelbras S.A. - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) Given Its Attractive Financial Prospects?

Intelbras - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) has had a rough three months with its share price down 32%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's ROE.

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.

Check out our latest analysis for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira

How Is ROE Calculated?

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 Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is:

20% = R$585m ÷ R$2.9b (Based on the trailing twelve months to September 2024).

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$0.20.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's Earnings Growth And 20% ROE

At first glance, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira seems to have a decent ROE. On comparing with the average industry ROE of 8.1% the company's ROE looks pretty remarkable. This probably laid the ground for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's significant 22% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is INTB3 worth today? The intrinsic value infographic in our free research report helps visualize whether INTB3 is currently mispriced by the market.

Is Intelbras - Indústria de Telecomunicação Eletrônica Brasileira Using Its Retained Earnings Effectively?

The three-year median payout ratio for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is 31%, which is moderately low. The company is retaining the remaining 69%. So it seems that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. As a result, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Summary

On the whole, we feel that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.