Equatorial Maranhão Distribuidora de Energia S.A.'s (BVMF:EQMA3B) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 12% over the past three months, it is easy to disregard Equatorial Maranhão Distribuidora de Energia (BVMF:EQMA3B). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Equatorial Maranhão Distribuidora de Energia's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Equatorial Maranhão Distribuidora de Energia

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 Equatorial Maranhão Distribuidora de Energia is:

20% = R$752m ÷ R$3.8b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.20 in profit.

Why Is ROE Important For 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. 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.

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. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Despite the moderate return on equity, Equatorial Maranhão Distribuidora de Energia has posted a net income growth of 2.2% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Equatorial Maranhão Distribuidora de Energia's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.9% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is EQMA3B fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Equatorial Maranhão Distribuidora de Energia Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 57% (that is, the company retains only 43% of its income) over the past three years for Equatorial Maranhão Distribuidora de Energia suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Equatorial Maranhão Distribuidora de Energia has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Equatorial Maranhão Distribuidora de Energia certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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. 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.

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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.