Is the recent performance of WEG SA (BVMF:WEGE3) shares linked to its strong fundamentals?

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Most readers already know that WEG (BVMF:WEGE3) stock is up a significant 18% over the past month. 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 will be paying attention to WEG’s ROE today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for WEG

How do you calculate return on equity?

The ROE formula is:

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

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

26% = R$3.6 billion ÷ R$14 billion (based on the last twelve months until June 2022).

The “return” is the annual profit. This means that for every R$ of equity, the company generated a profit of R$0.26.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

WEG and ROE earnings growth of 26%

At first glance, WEG seems to have a decent ROE. Compared to the industry average ROE of 7.3%, the company’s ROE looks quite remarkable. Probably because of this, WEG has been able to see an impressive net income growth of 28% over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with the industry net income growth, we found that WEG’s growth is quite high compared to the average industry growth of 12% over the same period, which is great have.

BOVESPA: WEGE3 Past Earnings Growth August 21, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if WEG is trading on a high P/E or a low P/E, relative to its industry.

Does WEG effectively reinvest its profits?

WEG has a significant three-year median payout ratio of 51%, which means the company only retains 49% of its revenue. This implies that the company has been able to achieve high earnings growth despite returning most of its earnings to shareholders.

Additionally, WEG is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 56%. As a result, WEG’s ROE isn’t expected to change much either, which we’ve inferred from analysts’ estimate of 30% for future ROE.

Summary

All in all, we are quite satisfied with WEG’s performance. In particular, its high ROE is quite remarkable and also the probable explanation for its considerable earnings growth. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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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