Are Robust Financials Driving The Recent Rally In S.C. Artego S.A.'s (BVB:ARTE) Stock?

S.C. Artego's (BVB:ARTE) stock is up by a considerable 9.2% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to S.C. Artego'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for S.C. Artego

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for S.C. Artego is:

12% = RON11m ÷ RON86m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each RON1 of shareholders' capital it has, the company made RON0.12 in profit.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

S.C. Artego's Earnings Growth And 12% ROE

To start with, S.C. Artego's ROE looks acceptable. On comparing with the average industry ROE of 2.8% the company's ROE looks pretty remarkable. This certainly adds some context to S.C. Artego's decent 7.3% net income growth seen over the past five years.

Next, on comparing S.C. Artego's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.3% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about S.C. Artego's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is S.C. Artego Using Its Retained Earnings Effectively?

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

Besides, S.C. Artego 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 S.C. Artego's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 S.C. Artego 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. 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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