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Rio Paranapanema Energia S.A. (BVMF:GEPA3) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Simply Wall St · 12/31/2025 09:00

With its stock down 17% over the past three months, it is easy to disregard Rio Paranapanema Energia (BVMF:GEPA3). 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. Particularly, we will be paying attention to Rio Paranapanema Energia's ROE today.

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.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Rio Paranapanema Energia is:

25% = R$446m ÷ R$1.8b (Based on the trailing twelve months to September 2025).

The 'return' is the profit over the last twelve months. That means that for every R$1 worth of shareholders' equity, the company generated R$0.25 in profit.

Check out our latest analysis for Rio Paranapanema Energia

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Rio Paranapanema Energia's Earnings Growth And 25% ROE

To start with, Rio Paranapanema Energia's ROE looks acceptable. Especially when compared to the industry average of 18% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why Rio Paranapanema Energia saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Rio Paranapanema Energia's reported growth was lower than the industry growth of 5.0% over the last few years, which is not something we like to see.

past-earnings-growth
BOVESPA:GEPA3 Past Earnings Growth December 31st 2025

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is GEPA3 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Rio Paranapanema Energia Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 67% (implying that the company keeps only 33% of its income) of its business to reinvest into its business), most of Rio Paranapanema Energia's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Rio Paranapanema Energia has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, it does look like Rio Paranapanema Energia has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Rio Paranapanema Energia's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.