Is Santos Brasil Participações S.A.'s (BVMF:STBP3) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Santos Brasil Participações' (BVMF:STBP3) stock increased significantly by 39% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Santos Brasil Participações' ROE.

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.

View our latest analysis for Santos Brasil Participações

How Do You Calculate Return On Equity?

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 Santos Brasil Participações is:

23% = R$504m ÷ R$2.2b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every R$1 worth of shareholders' equity, the company generated R$0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Santos Brasil Participações' Earnings Growth And 23% ROE

To begin with, Santos Brasil Participações seems to have a respectable ROE. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. This probably laid the ground for Santos Brasil Participações' significant 62% 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.

As a next step, we compared Santos Brasil Participações' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.2%.

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 Santos Brasil Participações''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Santos Brasil Participações Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 86% (implying that it keeps only 14% of profits) for Santos Brasil Participações suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Santos Brasil Participações has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. 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 92%. Regardless, the future ROE for Santos Brasil Participações is predicted to rise to 48% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that Santos Brasil Participações' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.