Is Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) Stock's Recent Performance A Reflection Of Its Financial Health?

Most readers would already know that Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) stock increased by 4.8% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Companhia Distribuidora de Gás do Rio de Janeiro - CEG's ROE today.

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.

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

How Do You Calculate Return On Equity?

The formula for ROE is:

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:

41% = R$547m ÷ R$1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every R$1 worth of equity, the company was able to earn R$0.41 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Companhia Distribuidora de Gás do Rio de Janeiro - CEG's Earnings Growth And 41% ROE

First thing first, we like that Companhia Distribuidora de Gás do Rio de Janeiro - CEG has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. This probably laid the groundwork for Companhia Distribuidora de Gás do Rio de Janeiro - CEG's moderate 11% net income growth seen over the past five years.

We then performed a comparison between Companhia Distribuidora de Gás do Rio de Janeiro - CEG's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Companhia Distribuidora de Gás do Rio de Janeiro - CEG's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Companhia Distribuidora de Gás do Rio de Janeiro - CEG Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Companhia Distribuidora de Gás do Rio de Janeiro - CEG suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Companhia Distribuidora de Gás do Rio de Janeiro - CEG has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Companhia Distribuidora de Gás do Rio de Janeiro - CEG's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Companhia Distribuidora de Gás do Rio de Janeiro - CEG and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.