Most readers would already know that Compañía Cervecerías Unidas' (SNSE:CCU) stock increased by 9.7% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. In this article, we decided to focus on Compañía Cervecerías Unidas' ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
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 Cervecerías Unidas is:
7.7% = CL$108b ÷ CL$1.4t (Based on the trailing twelve months to December 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.08 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Cervecerías Unidas' Earnings Growth And 7.7% ROE
As you can see, Compañía Cervecerías Unidas' ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.0%. Accordingly, Compañía Cervecerías Unidas' low net income growth of 2.6% over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing Compañía Cervecerías Unidas' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 2.6% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CCU worth today? The intrinsic value infographic in our free research report helps visualize whether CCU is currently mispriced by the market.
Is Compañía Cervecerías Unidas Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 72% (that is, the company retains only 28% of its income) over the past three years for Compañía Cervecerías Unidas suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, Compañía Cervecerías Unidas has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 68% of its profits over the next three years. Still, forecasts suggest that Compañía Cervecerías Unidas' future ROE will rise to 10% even though the the company's payout ratio is not expected to change by much.
On the whole, we feel that the performance shown by Compañía Cervecerías Unidas can be open to many interpretations. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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