Are Strong Financial Prospects The Force That Is Driving The Momentum In Grupo Lamosa, S.A.B. de C.V.'s BMV:LAMOSA) Stock?

By
Simply Wall St
Published
January 25, 2022
BMV:LAMOSA *
Source: Shutterstock

Most readers would already be aware that Grupo Lamosa. de's (BMV:LAMOSA) stock increased significantly by 59% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Grupo Lamosa. de's ROE in this article.

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

Check out our latest analysis for Grupo Lamosa. de

How Is ROE Calculated?

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 Lamosa. de is:

31% = Mex$3.9b ÷ Mex$13b (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.31 in profit.

What Has ROE Got To Do With 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 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.

Grupo Lamosa. de's Earnings Growth And 31% ROE

First thing first, we like that Grupo Lamosa. de has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. So, the substantial 23% net income growth seen by Grupo Lamosa. de over the past five years isn't overly surprising.

As a next step, we compared Grupo Lamosa. de'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 7.1%.

past-earnings-growth
BMV:LAMOSA * Past Earnings Growth January 25th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Grupo Lamosa. de is trading on a high P/E or a low P/E, relative to its industry.

Is Grupo Lamosa. de Making Efficient Use Of Its Profits?

Grupo Lamosa. de's ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. So it looks like Grupo Lamosa. de is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Grupo Lamosa. de is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we are quite pleased with Grupo Lamosa. de's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Grupo Lamosa. de.

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