Does Cristalerías de Chile S.A.'s (SNSE:CRISTALES) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Cristalerías de Chile (SNSE:CRISTALES) has had a great run on the share market with its stock up by a significant 7.2% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Cristalerías de Chile's 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.

Check out our latest analysis for Cristalerías de Chile

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cristalerías de Chile is:

5.2% = CL$19b ÷ CL$366b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every CLP1 worth of shareholders' equity, the company generated CLP0.05 in profit.

What Is The Relationship Between ROE And 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. 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.

Cristalerías de Chile's Earnings Growth And 5.2% ROE

It is quite clear that Cristalerías de Chile's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 6.2%. Given the circumstances, the significant decline in net income by 9.4% seen by Cristalerías de Chile over the last five years is not surprising.

However, when we compared Cristalerías de Chile's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.2% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Cristalerías de Chile's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Cristalerías de Chile Making Efficient Use Of Its Profits?

Cristalerías de Chile has a high three-year median payout ratio of 53% (that is, it is retaining 47% 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. Our risks dashboard should have the 4 risks we have identified for Cristalerías de Chile.

Additionally, Cristalerías de Chile 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.

Summary

On the whole, Cristalerías de Chile's performance is quite a big let-down. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Cristalerías de Chile's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you decide to trade Cristalerías de Chile, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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