It’s hard to get excited after seeing the recent performance of Grupo Vasconia (BMV:VASCONI), as its stock is down 23% in the past month. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will pay attention today to the ROE of Grupo Vasconia.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Grupo Vasconia
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Grupo Vasconia is:
8.2% = Mex$178 million ÷ Mex$2.2 billion (based on the last twelve months to March 2022).
The “return” is the annual profit. One way to conceptualize this is that for every MX$1 of share capital it has, the company has made a profit of MX$0.08.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Growth in Grupo Vasconia earnings and ROE of 8.2%
It is clear that Grupo Vasconia’s ROE is rather weak. A comparison with the industry shows that the company’s ROE is quite similar to the average industry ROE of 8.2%. Considering in particular Grupo Vasconia’s exceptional five-year net profit growth of 43%, we are definitely impressed. Given the low ROE, it is quite possible that other aspects positively influence the company’s earnings growth. For example, the business has a low payout ratio or is efficiently managed.
Considering the fact that industry profits fell 4.1% over the same period, the company’s net profit growth is quite remarkable.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Grupo Vasconia’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Grupo Vasconia effectively reinvest its profits?
Grupo Vasconia’s three-year median payout ratio is below 13%, meaning it keeps a higher percentage (87%) of its earnings. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.
Additionally, Grupo Vasconia is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.
Overall, we believe Grupo Vasconia has positive attributes. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 3 risks we identified for Grupo Vasconia.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.