It’s hard to get excited after looking at the recent performance of C. V’s Megacable Holdings SAB (BMV: MEGACPO), as its stock has fallen 6.3% in the past three months. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In this article we have decided to focus on the ROE of Megacable Holdings SAB de CV
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for C. V’s Megacable Holdings SAB
How do you 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 Megacable Holdings SAB de C. V is:
13% = 4.4 billion Mex ÷ 34 billion Mex (based on the last twelve months up to June 2021).
The “return” is the annual profit. This therefore means that for every MX $ 1 invested by its shareholder, the company generates a profit of MX $ 0.13.
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. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. 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 earnings growth and 13% ROE of C. V’s Megacable Holdings SAB
At first glance, the ROE of C. V’s Megacable Holdings SAB is not much to say. While further study shows the company’s ROE to be 11% above the industry average, something we certainly can’t ignore. Still, CV’s Megacable Holdings SAB has posted meager 3.0% growth over the past five years. Remember, the company’s ROE is low enough to start with, just above the industry average. This therefore partly explains the weak growth in earnings.
Next, comparing with the industry’s net income growth, we found that C. V’s reported growth of Megacable Holdings SAB was lower than the industry’s growth of 3.8% over the same period, which we do not like to see.
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 will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether C. V’s Megacable Holdings SAB is trading high P / E or low P / E, relative to its industry.
Is C. V’s Megacable Holdings SAB Using Profits Efficiently?
While C. V’s Megacable Holdings SAB has a decent three-year median payout ratio of 39% (or 61% retention rate), it has seen very little profit growth. So there could be another explanation for this. For example, the business of the company can deteriorate.
Additionally, CV’s Megacable Holdings SAB has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 49% over the next three years. Despite the expected higher payout ratio, the company’s ROE is not expected to change much.
Overall, we think C. V’s Megacable Holdings SAB certainly has some positive factors to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. 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. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 any of the stocks mentioned.
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