Can Financials Drive Portuaria Cabo Froward S.A.'s (SNSE:FROWARD) Stock Price Higher?

Looking at Portuaria Cabo Froward's (SNSE:FROWARD) mostly flat share price movement over the past week, it is easy to think that there’s nothing interesting about the stock. However, the company's key financials probably have more to say so you may want to give the company a closer look given that stock prices usually follow the long-term financial performance of a business. Particularly, we will be paying attention to Portuaria Cabo Froward'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Portuaria Cabo Froward

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 Portuaria Cabo Froward is:

11% = US$8.4m ÷ US$78m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every CLP1 of its shareholder's investments, the company generates a profit of CLP0.11.

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. 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.

A Side By Side comparison of Portuaria Cabo Froward's Earnings Growth And 11% ROE

At first glance, Portuaria Cabo Froward's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 8.2% which we definitely can't overlook. This probably goes some way in explaining Portuaria Cabo Froward's moderate 9.0% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Portuaria Cabo Froward's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 2.8%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Portuaria Cabo Froward fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Portuaria Cabo Froward Making Efficient Use Of Its Profits?

While Portuaria Cabo Froward has a three-year median payout ratio of 62% (which means it retains 38% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Portuaria Cabo Froward has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Portuaria Cabo Froward certainly does have some positive factors to consider. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Portuaria Cabo Froward'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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