Petro Rio SA (BVMF: PRIO3) shares have fallen, but fundamentals look strong: is the market wrong?
It’s hard to get excited after looking at the recent performance of Petro Rio (BVMF: PRIO3), as its stock has fallen 11% in the past month. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. Specifically, we decided to study Petro Rio’s ROE in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
See our latest analysis for Petro Rio
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, Petro Rio’s ROE is:
18% = 969 million reais Ã· 5.4 billion reais (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every R $ 1 of shareholder capital it has, the company has made a profit of R $ 0.18.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Petro Rio’s 18% profit growth and ROE
For starters, Petro Rio’s ROE seems acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 9.0%. This likely laid the groundwork for Petro Rio’s significant 34% net income growth seen over the past five years. We believe that there could also be other aspects that positively influence the company’s profit 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 Petro Rio’s growth is quite high compared to the industry average growth of 12% over the same period, which is great to see.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is PRIO3 correctly valued? This intrinsic business value infographic has everything you need to know.
Is Petro Rio Using Profits Efficiently?
Overall, we are quite happy with the performance of Petro Rio. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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