Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) stock increased significantly by 93% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Companhia Distribuidora de Gás do Rio de Janeiro - CEG'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Companhia Distribuidora de Gás do Rio de Janeiro - CEG

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 Companhia Distribuidora de Gás do Rio de Janeiro - CEG is:

33% = R$393m ÷ R$1.2b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.33 in profit.

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. 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.

Companhia Distribuidora de Gás do Rio de Janeiro - CEG's Earnings Growth And 33% ROE

To begin with, Companhia Distribuidora de Gás do Rio de Janeiro - CEG has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Yet, Companhia Distribuidora de Gás do Rio de Janeiro - CEG has posted measly growth of 3.2% over the past five years. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Companhia Distribuidora de Gás do Rio de Janeiro - CEG's reported growth was lower than the industry growth of 6.6% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Companhia Distribuidora de Gás do Rio de Janeiro - CEG fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Companhia Distribuidora de Gás do Rio de Janeiro - CEG Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like Companhia Distribuidora de Gás do Rio de Janeiro - CEG has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Companhia Distribuidora de Gás do Rio de Janeiro - CEG.

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This article by Simply Wall St is general in nature. 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.
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