Is Compañía Electro Metalúrgica S.A.'s (SNSE:ELECMETAL) Recent Performance Indicative of Weak Fundamentals?

It is easy to overlook Compañía Electro Metalúrgica's (SNSE:ELECMETAL) given its unimpressive and roughly flat price performance over the past month. Since the markets usually pay for a company’s long term financial health, we decided to look at the company's weak fundamentals to get a sense of what the future could hold. Particularly, we will be paying attention to Compañía Electro Metalúrgica'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.

View our latest analysis for Compañía Electro Metalúrgica

How Is ROE Calculated?

ROE 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 Compañía Electro Metalúrgica is:

5.9% = CL$35b ÷ CL$587b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every CLP1 worth of shareholders' equity, the company generated CLP0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Compañía Electro Metalúrgica's Earnings Growth And 5.9% ROE

As you can see, Compañía Electro Metalúrgica's ROE looks pretty weak. Not just that, even compared to the industry average of 7.9%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 7.5% seen by Compañía Electro Metalúrgica over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.7% in the same period, we found that Compañía Electro Metalúrgica's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Compañía Electro Metalúrgica fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Compañía Electro Metalúrgica Using Its Retained Earnings Effectively?

Compañía Electro Metalúrgica's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 50% (or a retention ratio of 50%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for Compañía Electro Metalúrgica visit our risks dashboard for free.

Additionally, Compañía Electro Metalúrgica has paid dividends over a period of eight years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

Overall, we would be extremely cautious before making any decision on Compañía Electro Metalúrgica. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Compañía Electro Metalúrgica and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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