Is Molibdenos y Metales S.A.'s (SNSE:MOLYMET) Recent Performancer Underpinned By Weak Financials?

Molibdenos y Metales (SNSE:MOLYMET) has had a rough three months with its share price down 2.9%. 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. In this article, we decided to focus on Molibdenos y Metales' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Molibdenos y Metales

How Do You Calculate Return On Equity?

ROE 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 Molibdenos y Metales is:

6.3% = US$48m ÷ US$756m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every CLP1 worth of shareholders' equity, the company generated CLP0.06 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. 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.

Molibdenos y Metales' Earnings Growth And 6.3% ROE

As you can see, Molibdenos y Metales' ROE looks pretty weak. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. For this reason, Molibdenos y Metales' five year net income decline of 14% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Molibdenos y Metales' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 5.2% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Molibdenos y Metales is trading on a high P/E or a low P/E, relative to its industry.

Is Molibdenos y Metales Making Efficient Use Of Its Profits?

Molibdenos y Metales' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 50% (or a retention ratio of 50%). With only very little left to reinvest into the business, growth in earnings is far from likely.

Additionally, Molibdenos y Metales 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.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Molibdenos y Metales. 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. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Molibdenos y Metales' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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