Is Promotora y Operadora de Infraestructura, S. A. B. de C. V.'s (BMV:PINFRA) Stock On A Downtrend As A Result Of Its Poor Financials?

With its stock down 6.9% over the past week, it is easy to disregard Promotora y Operadora de Infraestructura S. A. B. de C. V (BMV:PINFRA). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Promotora y Operadora de Infraestructura S. A. B. de C. V's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Promotora y Operadora de Infraestructura S. A. B. de C. V

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Promotora y Operadora de Infraestructura S. A. B. de C. V is:

13% = Mex$7.3b ÷ Mex$57b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MX$1 worth of shareholders' equity, the company generated MX$0.13 in profit.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Promotora y Operadora de Infraestructura S. A. B. de C. V's Earnings Growth And 13% ROE

On the face of it, Promotora y Operadora de Infraestructura S. A. B. de C. V's ROE is not much to talk about. Next, when compared to the average industry ROE of 21%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 3.7% seen by Promotora y Operadora de Infraestructura S. A. B. de C. V over the past five years could probably be the result of the low ROE.

We then compared Promotora y Operadora de Infraestructura S. A. B. de C. V's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Promotora y Operadora de Infraestructura S. A. B. de C. V's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Promotora y Operadora de Infraestructura S. A. B. de C. V Using Its Retained Earnings Effectively?

Promotora y Operadora de Infraestructura S. A. B. de C. V has a three-year median payout ratio of 64% (implying that it keeps only 36% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

In addition, Promotora y Operadora de Infraestructura S. A. B. de C. V has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 44% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we would be extremely cautious before making any decision on Promotora y Operadora de Infraestructura S. A. B. de C. V. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.