Empresas Gasco S.A.'s (SNSE:GASCO) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Empresas Gasco's (SNSE:GASCO) stock is up by a considerable 8.7% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Empresas Gasco's ROE.

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.

Check out our latest analysis for Empresas Gasco

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 Empresas Gasco is:

2.8% = CL$8.5b ÷ CL$306b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CLP1 of shareholders' capital it has, the company made CLP0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Empresas Gasco's Earnings Growth And 2.8% ROE

It is quite clear that Empresas Gasco's ROE is rather low. Even when compared to the industry average of 18%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Empresas Gasco grew its net income at a significant rate of 25% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Empresas Gasco'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 6.7%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Empresas Gasco's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Empresas Gasco Efficiently Re-investing Its Profits?

The really high three-year median payout ratio of 142% for Empresas Gasco suggests that the company is paying its shareholders more than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 2 risks we have identified for Empresas Gasco visit our risks dashboard for free.

Moreover, Empresas Gasco is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that the performance shown by Empresas Gasco can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. 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 Empresas Gasco'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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