Will the weakness of Porto Seguro SA (BVMF: PSSA3) stock prove temporary given solid fundamentals?


It’s hard to get excited after looking at the recent performances of Porto Seguro (BVMF: PSSA3), as its stock has fallen 6.2% in the past month. However, a closer look at his strong finances might get you to think again. Since fundamentals usually determine long-term market outcomes, the business is worth considering. Specifically, we decided to study the ROE of Porto Seguro 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. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest analysis for Porto Seguro

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

Thus, based on the above formula, the ROE of Porto Seguro is:

20% = R $ 1.8 billion ÷ R $ 8.7 billion (based on the last twelve months up to March 2021).

The “return” is the profit of the last twelve months. This means that for every R $ 1 of equity, the company generated R $ 0.20 in profit.

Why is ROE important for profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. 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.

Porto Seguro profit growth and 20% ROE

For starters, Porto Seguro seems to have a respectable ROE. Even compared to the industry average of 20%, the company’s ROE looks pretty decent. This certainly adds context to Porto Seguro’s moderate 13% net income growth seen over the past five years.

Then, comparing with the growth in net income of the industry, we found that the growth of Porto Seguro is quite high compared to the industry average growth of 10% during the same period, which is great to see.

BOVESPA: PSSA3 Past profit growth on July 23, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you are wondering about the valuation of Porto Seguro, check out this gauge of its price / earnings ratio, compared to its industry.

Is Porto Seguro using its profits effectively?

Porto Seguro has a three-year median payout rate of 50%, which means it keeps the remaining 50% of its profits. This suggests that its dividend is well hedged and, given the decent growth of the company, it appears that management is reinvesting its earnings in an efficient manner.

In addition, Porto Seguro is determined to continue to share its profits with its shareholders, which we deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 53% of its profits over the next three years. As a result, Porto Seguro’s ROE is not expected to change much either, which we have deduced from analysts’ estimate of 17% for future ROE.


Overall, we are quite happy with the performance of Porto Seguro. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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