Can Sociedad Matriz SAAM S.A.'s (SNSE:SMSAAM) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Sociedad Matriz SAAM (SNSE:SMSAAM) has had a great run on the share market with its stock up by a significant 9.4% over the last month. 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 Sociedad Matriz SAAM's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Sociedad Matriz SAAM

How Do You 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 Sociedad Matriz SAAM is:

2.1% = US$26m ÷ US$1.2b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CLP1 of its shareholder's investments, the company generates a profit of CLP0.02.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Sociedad Matriz SAAM's Earnings Growth And 2.1% ROE

It is quite clear that Sociedad Matriz SAAM's ROE is rather low. Not just that, even compared to the industry average of 13%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 26% seen by Sociedad Matriz SAAM was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

However, when we compared Sociedad Matriz SAAM's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.6% 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. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Sociedad Matriz SAAM is trading on a high P/E or a low P/E, relative to its industry.

Is Sociedad Matriz SAAM Making Efficient Use Of Its Profits?

Sociedad Matriz SAAM's high three-year median payout ratio of 188% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 3 risks we have identified for Sociedad Matriz SAAM.

In addition, Sociedad Matriz SAAM 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 Sociedad Matriz SAAM. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in 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 Sociedad Matriz SAAM's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.