Declining Stock and Decent Financials: Is The Market Wrong About Viña Concha y Toro S.A. (SNSE:CONCHATORO)?

It is hard to get excited after looking at Viña Concha y Toro's (SNSE:CONCHATORO) recent performance, when its stock has declined 7.5% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Viña Concha y Toro's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Viña Concha y Toro

How Do You Calculate Return On Equity?

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 Viña Concha y Toro is:

12% = CL$73b ÷ CL$626b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CLP1 worth of equity, the company was able to earn CLP0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

A Side By Side comparison of Viña Concha y Toro's Earnings Growth And 12% ROE

On the face of it, Viña Concha y Toro's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 9.1% which we definitely can't overlook. Still, Viña Concha y Toro's net income growth of 4.4% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

We then performed a comparison between Viña Concha y Toro's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.4% in the same period.

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. Is CONCHATORO fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Viña Concha y Toro Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 34% (implying that the company retains the remaining 66% of its income), Viña Concha y Toro's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Viña Concha y Toro has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Accordingly, forecasts suggest that Viña Concha y Toro's future ROE will be 11% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that Viña Concha y Toro has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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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