Are Strong Financial Prospects The Force That Is Driving The Momentum In Brisanet Participações S.A.'s BVMF:BRIT3) Stock?

Brisanet Participações' (BVMF:BRIT3) stock is up by a considerable 20% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Brisanet Participações' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Brisanet Participações

How Is ROE Calculated?

ROE 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 Brisanet Participações is:

11% = R$163m ÷ R$1.5b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every R$1 worth of shareholders' equity, the company generated R$0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Brisanet Participações' Earnings Growth And 11% ROE

It is hard to argue that Brisanet Participações' ROE is much good in and of itself. Still, the company's ROE is higher than the average industry ROE of 7.2% so that's certainly interesting. Especially when you consider Brisanet Participações' exceptional 39% net income growth over the past five years. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Brisanet Participações' growth is quite high when compared to the industry average growth of 31% in the same period, which is great 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Brisanet Participações''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Brisanet Participações Making Efficient Use Of Its Profits?

Brisanet Participações has a really low three-year median payout ratio of 14%, meaning that it has the remaining 86% left over to reinvest into its business. So it looks like Brisanet Participações is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, Brisanet Participações only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we are quite pleased with Brisanet Participações' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

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

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.