Is Viña San Pedro Tarapacá S.A.'s (SNSE:VSPT) Recent Performance Indicative of Weak Fundamentals?

Looking at Viña San Pedro Tarapacá's (SNSE:VSPT) mostly flat share price movement over the past month, it is easy to think that there’s nothing interesting about the stock. Add to that, its key financial performance indicators look pretty bleak, and it is common knowledge that fundamentals usually determine the future outcome of a stock in the long-run. Specifically, we decided to study Viña San Pedro Tarapacá's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Viña San Pedro Tarapacá

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 Viña San Pedro Tarapacá is:

11% = CL$27b ÷ CL$251b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 San Pedro Tarapacá's Earnings Growth And 11% ROE

At first glance, Viña San Pedro Tarapacá's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.1%, so we won't completely dismiss the company. Having said that, Viña San Pedro Tarapacá's five year net income decline rate was 5.7%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared Viña San Pedro Tarapacá's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 4.4% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Viña San Pedro Tarapacá's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Viña San Pedro Tarapacá Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 50% (implying that 50% of the profits are retained), most of Viña San Pedro Tarapacá's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 2 risks we have identified for Viña San Pedro Tarapacá by visiting our risks dashboard for free on our platform here.

In addition, Viña San Pedro Tarapacá has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Viña San Pedro Tarapacá. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Viña San Pedro Tarapacá's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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