Weak Financial Prospects Seem To Be Dragging Down Compañía Cervecerías Unidas S.A. (SNSE:CCU) Stock

With its stock down 17% over the past three months, it is easy to disregard Compañía Cervecerías Unidas (SNSE:CCU). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Compañía Cervecerías Unidas' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Compañía Cervecerías Unidas

How To 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:

7.3% = CL$112b ÷ CL$1.5t (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CLP1 worth of equity, the company was able to earn CLP0.07 in profit.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Compañía Cervecerías Unidas' Earnings Growth And 7.3% 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 7.9%. Given the low ROE Compañía Cervecerías Unidas' five year net income decline of 7.3% is not surprising.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 0.05% over the last few years, we found that Compañía Cervecerías Unidas' 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Compañía Cervecerías Unidas''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Compañía Cervecerías Unidas Making Efficient Use Of Its Profits?

Compañía Cervecerías Unidas has a high three-year median payout ratio of 67% (that is, it is retaining 33% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

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's future payout ratio is expected to drop to 46% over the next three years. As a result, the expected drop in Compañía Cervecerías Unidas' payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.

Summary

On the whole, Compañía Cervecerías Unidas' performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com