Zona Franca de Iquique S.A.'s (SNSE:ZOFRI) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Zona Franca de Iquique's (SNSE:ZOFRI) stock increased significantly by 23% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Zona Franca de Iquique's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zona Franca de Iquique

How To 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 Zona Franca de Iquique is:

23% = CL$14b ÷ CL$63b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CLP1 of its shareholder's investments, the company generates a profit of CLP0.23.

Why Is ROE Important For 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 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.

Zona Franca de Iquique's Earnings Growth And 23% ROE

To begin with, Zona Franca de Iquique seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.5%. Probably as a result of this, Zona Franca de Iquique was able to see a decent growth of 7.2% over the last five years.

Next, on comparing with the industry net income growth, we found that Zona Franca de Iquique's reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Zona Franca de Iquique fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zona Franca de Iquique Efficiently Re-investing Its Profits?

Zona Franca de Iquique has a significant three-year median payout ratio of 50%, meaning that it is left with only 50% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Zona Franca de Iquique has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Zona Franca de Iquique's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into Zona Franca de Iquique'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. 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.