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Has Direcional Engenharia S.A.’s (BVMF:DIRR3) Impressive Stock Performance Got Anything to Do With Its Fundamentals?


Direcional Engenharia (BVMF:DIRR3) has had a great run on the share market with its stock up by a significant 20% over the last three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Direcional Engenharia’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 Direcional Engenharia

How To 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 Direcional Engenharia is:

15% = R$219m ÷ R$1.5b (Based on the trailing twelve months to March 2022).

The ‘return’ is the amount earned after tax 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$0.15 in profit.

Why Is ROE Important For 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.

Direcional Engenharia’s Earnings Growth And 15% ROE

When you first look at it, Direcional Engenharia’s ROE doesn’t look that attractive. Yet, a closer study shows that the company’s ROE is similar to the industry average of 13%. Looking at Direcional Engenharia’s exceptional 64% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Direcional Engenharia’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 47% in the same period.

BOVESPA:DIRR3 Past Earnings Growth August 5th 2022

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. Is Direcional Engenharia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Direcional Engenharia Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 76% (implying that it keeps only 24% of profits) for Direcional Engenharia suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.

Moreover, Direcional Engenharia is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, it does look like Direcional Engenharia has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.



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