Compañía Cervecerías Unidas S.A.'s (SNSE:CCU) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Compañía Cervecerías Unidas' (SNSE:CCU) stock increased significantly by 29% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Compañía Cervecerías Unidas' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Compañía Cervecerías Unidas

How Do You Calculate Return On Equity?

Return on equity 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:

7.6% = CL$108b ÷ CL$1.4t (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every CLP1 of its shareholder's investments, the company generates a profit of CLP0.08.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Compañía Cervecerías Unidas' Earnings Growth And 7.6% ROE

It is hard to argue that Compañía Cervecerías Unidas' ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 9.1%. So we are actually pleased to see that Compañía Cervecerías Unidas' net income grew at an acceptable rate of 5.7% over the last five years. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Compañía Cervecerías Unidas' growth is quite high when compared to the industry average growth of 4.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 62% (or a retention ratio of 38%) for Compañía Cervecerías Unidas suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Compañía Cervecerías Unidas has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 77% over the next three years. Regardless, the future ROE for Compañía Cervecerías Unidas is speculated to rise to 9.5% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

Overall, we feel that Compañía Cervecerías Unidas certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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