Has Hortifrut S.A.'s (SNSE:HF) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Hortifrut's (SNSE:HF) stock increased significantly by 15% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Hortifrut'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.

View our latest analysis for Hortifrut

How To 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 Hortifrut is:

6.7% = US$48m ÷ US$725m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.07 in profit.

Why Is ROE Important For 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.

Hortifrut's Earnings Growth And 6.7% ROE

It is hard to argue that Hortifrut's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 7.5% either. However, the modest 12% net income growth seen by Hortifrut over the past five years is a positive sign. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Hortifrut's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Hortifrut's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hortifrut Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that Hortifrut is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Hortifrut has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Hortifrut has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Hortifrut by visiting our risks dashboard for free on our platform here.

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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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