Unicasa Indústria de Móveis (BVMF:UCAS3) has had a great run on the share market with its stock up by a significant 18% over the last 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. In this article, we decided to focus on Unicasa Indústria de Móveis’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Unicasa Indústria de Móveis
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 Unicasa Indústria de Móveis is:
20% = R$38m ÷ R$189m (Based on the trailing twelve months to June 2022).
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 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.
A Side By Side comparison of Unicasa Indústria de Móveis’ Earnings Growth And 20% ROE
To start with, Unicasa Indústria de Móveis’ ROE looks acceptable. On comparing with the average industry ROE of 11% the company’s ROE looks pretty remarkable. Probably as a result of this, Unicasa Indústria de Móveis was able to see an impressive net income growth of 64% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Unicasa Indústria de Móveis’ 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 41%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is Unicasa Indústria de Móveis fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Unicasa Indústria de Móveis Using Its Retained Earnings Effectively?
Unicasa Indústria de Móveis’ significant three-year median payout ratio of 75% (where it is retaining only 25% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Moreover, Unicasa Indústria de Móveis is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.
In total, we are pretty happy with Unicasa Indústria de Móveis’ performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. To gain further insights into Unicasa Indústria de Móveis’ past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
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