Most readers already know that the stock of Mediaset España Comunicación (BME: TL5) has risen 9.8% in the past three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play. in the recent price movement. In particular, we will pay particular attention to the ROE of Mediaset España Comunicación today.
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.
Check out our latest review for Mediaset España Comunicación
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Mediaset España Comunicación is:
14% = 169 million euros ÷ 1.2 billion euros (based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.14 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of the profit growth and 14% ROE of Mediaset España Comunicación
For starters, Mediaset España Comunicación seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 9.6%. However, we are curious as to how the high returns have further resulted in stable growth for Mediaset España Comunicación over the past five years. Therefore, other aspects could potentially prevent the growth of the company. These include low profit retention or poor capital allocation.
Next, we compared the performance of Mediaset España Comunicación to that of the industry and found that the industry reduced its profits to 8.2% over the same period, suggesting that the company’s profits have shrunk at a slower pace than its industry. This offers some relief to shareholders.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Has the market assessed the future prospects of TL5? You can find out in our latest Intrinsic Value infographic research report.
Is Mediaset España Comunicación using its profits efficiently?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. We deduce that the company has reinvested all its profits to develop its activity.
Overall, we believe that Mediaset España Comunicación has strengths. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, we’ve looked at the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect earnings to increase, albeit marginally, in the future. 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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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 material. Simply Wall St has no position in the mentioned stocks.
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