Is Sociedad Matriz SAAM S.A.'s (SNSE:SMSAAM) Recent Performancer Underpinned By Weak Financials?

It is hard to get excited after looking at Sociedad Matriz SAAM's (SNSE:SMSAAM) recent performance, when its stock has declined 7.1% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Sociedad Matriz SAAM's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sociedad Matriz SAAM

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Sociedad Matriz SAAM is:

7.2% = US$59m ÷ US$821m (Based on the trailing twelve months to September 2020).

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 CLP0.07.

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. 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 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.

A Side By Side comparison of Sociedad Matriz SAAM's Earnings Growth And 7.2% ROE

As you can see, Sociedad Matriz SAAM's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 7.5% either. Given the circumstances, the significant decline in net income by 4.6% seen by Sociedad Matriz SAAM over the last five years is not surprising.

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 2.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. 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 Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 58% (implying that 42% of the profits are retained), most of Sociedad Matriz SAAM's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Sociedad Matriz SAAM by visiting our risks dashboard for free on our platform here.

In addition, Sociedad Matriz SAAM has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

On the whole, Sociedad Matriz SAAM's performance is quite a big let-down. 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 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. 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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