Does The Market Have A Low Tolerance For Grupo Rotoplas S.A.B. de C.V.'s (BMV:AGUA) Mixed Fundamentals?

With its stock down 20% over the past month, it is easy to disregard Grupo Rotoplas. de (BMV:AGUA). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Grupo Rotoplas. de's ROE in this article.

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 Grupo Rotoplas. de

How Do You 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 Grupo Rotoplas. de is:

6.5% = Mex$421m ÷ Mex$6.4b (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 MX$1 of its shareholder's investments, the company generates a profit of MX$0.07.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Grupo Rotoplas. de's Earnings Growth And 6.5% ROE

As you can see, Grupo Rotoplas. de's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 5.7% either. Thus, the low ROE provides some context to Grupo Rotoplas. de's flat net income growth over the past five years.

As a next step, we compared Grupo Rotoplas. de's net income growth with the industry and discovered that the industry saw an average growth of 4.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Grupo Rotoplas. de fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Grupo Rotoplas. de Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 41% (meaning the company retains59% of profits) in the last three-year period, Grupo Rotoplas. de's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Grupo Rotoplas. de has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Grupo Rotoplas. de's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Grupo Rotoplas. de'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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