Weak Financial Prospects Seem To Be Dragging Down Sociedad Matriz SAAM S.A. (SNSE:SMSAAM) Stock

By
Simply Wall St
Published
May 31, 2021
SNSE:SMSAAM
Source: Shutterstock

It is hard to get excited after looking at Sociedad Matriz SAAM's (SNSE:SMSAAM) recent performance, when its stock has declined 11% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on Sociedad Matriz SAAM's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Sociedad Matriz SAAM

How To Calculate Return On Equity?

The formula for ROE is:

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

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

8.3% = US$71m ÷ US$856m (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Sociedad Matriz SAAM's Earnings Growth And 8.3% ROE

As you can see, Sociedad Matriz SAAM's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 7.5%. Therefore, it might not be wrong to say that the five year net income decline of 2.2% seen by Sociedad Matriz SAAM was possibly a result of the disappointing ROE.

So, as a next step, we compared Sociedad Matriz SAAM's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.6% in the same period.

past-earnings-growth
SNSE:SMSAAM Past Earnings Growth May 31st 2021

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 59% (implying that 41% 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. To know the 4 risks we have identified for Sociedad Matriz SAAM visit our risks dashboard for free.

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.

Summary

Overall, we would be extremely cautious before making any decision on Sociedad Matriz SAAM. 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. Up till now, we've only made a short study of the company's growth data. You can do your own research on Sociedad Matriz SAAM 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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