Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Stock Is Going Strong: Is the Market Following Fundamentals?

Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) stock is up by a considerable 5.1% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

How Is ROE Calculated?

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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP is:

25% = R$9.3b ÷ R$38b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.25 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 de Saneamento Básico do Estado de São Paulo - SABESP's Earnings Growth And 25% ROE

At first glance, Companhia de Saneamento Básico do Estado de São Paulo - SABESP seems to have a decent ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, Companhia de Saneamento Básico do Estado de São Paulo - SABESP was able to see a decent growth of 19% over the last five years.

As a next step, we compared Companhia de Saneamento Básico do Estado de São Paulo - SABESP's 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 8.5%.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Companhia de Saneamento Básico do Estado de São Paulo - SABESP's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Companhia de Saneamento Básico do Estado de São Paulo - SABESP Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Companhia de Saneamento Básico do Estado de São Paulo - SABESP is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 36% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 12%) over the same period.

Conclusion

In total, we are pretty happy with Companhia de Saneamento Básico do Estado de São Paulo - SABESP's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.