Does Soquimich Comercial S.A.'s (SNSE:SOQUICOM) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Soquimich Comercial's (SNSE:SOQUICOM) stock is up by a considerable 29% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Soquimich Comercial's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Soquimich Comercial is:

13% = US$8.8m ÷ US$67m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CLP1 worth of equity, the company was able to earn CLP0.13 in profit.

Check out our latest analysis for Soquimich Comercial

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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Soquimich Comercial's Earnings Growth And 13% ROE

On the face of it, Soquimich Comercial's ROE is not much to talk about. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. We can see that Soquimich Comercial has grown at a five year net income growth average rate of 4.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing Soquimich Comercial's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.0% over the last few years.

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 Soquimich Comercial's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Soquimich Comercial Efficiently Re-investing Its Profits?

Soquimich Comercial has a very high three-year median payout ratio of 102%suggesting that the company's shareholders are getting paid from more than just the company's income. That's a huge risk in our books. Our risks dashboard should have the 2 risks we have identified for Soquimich Comercial.

In addition, Soquimich Comercial 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

In total, we would have a hard think before deciding on any investment action concerning Soquimich Comercial. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Soquimich Comercial and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.