Are Grupo Carso, S.A.B. de C.V.'s (BMV:GCARSOA1) Mixed Financials Driving The Negative Sentiment?

It is hard to get excited after looking at Grupo Carso. de's (BMV:GCARSOA1) recent performance, when its stock has declined 25% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Grupo Carso. de's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Grupo Carso. de

How Do You Calculate Return On Equity?

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 Grupo Carso. de is:

7.2% = Mex$7.4b ÷ Mex$102b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.07.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Grupo Carso. de's Earnings Growth And 7.2% ROE

It is hard to argue that Grupo Carso. de's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 7.9% either. Therefore, the low net income growth of 2.1% seen by Grupo Carso. de over the past five years could probably be the result of it having a lower ROE.

We then compared Grupo Carso. de's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.9% in the same period, which is a bit concerning.

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. Is Grupo Carso. de fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Grupo Carso. de Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 39% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we have mixed feelings about Grupo Carso. de. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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