Eneva S.A.'s (BVMF:ENEV3) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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With its stock down 18% over the past three months, it is easy to disregard Eneva (BVMF:ENEV3). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Eneva’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Eneva

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 Eneva is:

16% = R$1.4b ÷ R$8.6b (Based on the trailing twelve months to September 2021).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every R$1 of its shareholder’s investments, the company generates a profit of R$0.16.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Eneva’s Earnings Growth And 16% ROE

On the face of it, Eneva’s ROE is not much to talk about. Next, when compared to the average industry ROE of 28%, the company’s ROE leaves us feeling even less enthusiastic. However, we we’re pleasantly surprised to see that Eneva grew its net income at a significant rate of 46% in the last five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Eneva’s growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.

BOVESPA:ENEV3 Past Earnings Growth January 15th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. What is ENEV3 worth today? The intrinsic value infographic in our free research report helps visualize whether ENEV3 is currently mispriced by the market.

Is Eneva Using Its Retained Earnings Effectively?

Eneva doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

Overall, we feel that Eneva certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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.