Equatorial Maranhão Distribuidora de Energia S.A.'s (BVMF:EQMA3B) Stock Been Rising: Are Strong Financials Guiding The Market?

Equatorial Maranhão Distribuidora de Energia's (BVMF:EQMA3B) stock up by 2.9% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Equatorial Maranhão Distribuidora de Energia's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Equatorial Maranhão Distribuidora de Energia

How Do You Calculate Return On Equity?

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 Equatorial Maranhão Distribuidora de Energia is:

20% = R$658m ÷ R$3.2b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.20 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.

Equatorial Maranhão Distribuidora de Energia's Earnings Growth And 20% ROE

At first glance, Equatorial Maranhão Distribuidora de Energia seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 16%. Probably as a result of this, Equatorial Maranhão Distribuidora de Energia was able to see a decent growth of 14% over the last five years.

As a next step, we compared Equatorial Maranhão Distribuidora de Energia's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Equatorial Maranhão Distribuidora de Energia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Equatorial Maranhão Distribuidora de Energia Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 48% (implying that the company retains 52% of its profits), it seems that Equatorial Maranhão Distribuidora de Energia is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Equatorial Maranhão Distribuidora de Energia has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Equatorial Maranhão Distribuidora de Energia's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Equatorial Maranhão Distribuidora de Energia by visiting our risks dashboard for free on our platform here.

If you’re looking to trade Equatorial Maranhão Distribuidora de Energia, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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