Does the latest stock market performance of Eternit SA (BVMF:ETER3) reflect its financial health?

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Most readers already know that Eternit (BVMF:ETER3) stock is up a significant 23% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we’ll be paying close attention to Eternit’s ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for Eternit

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Eternit is:

62% = R$337 million ÷ R$541 million (based on the last twelve months to September 2021).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every R$1 of share capital it has, the company has made a profit of R$0.62.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Eternit earnings growth and ROE of 62%

For starters, Eternit has a pretty high ROE, which is interesting. Second, even compared to the industry average of 8.8%, the company’s ROE is quite impressive. So, the substantial net income growth of 53% seen by Eternit over the last five years is not too surprising.

We then compared Eternit’s net income growth with the industry and we are happy to see that the company’s growth figure is higher compared to the industry which has a 10% growth rate in during the same period.

BOVESPA:ETER3 Past Earnings Growth February 1, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is Eternit correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Eternit effectively use its retained earnings?

Eternit does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.

Summary

All in all, we’re pretty happy with Eternit’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. If the company continues to increase earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. You can see the 3 risks we have identified for Eternit by visiting our risk dashboard for free on our platform here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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