Grupo Comercial Chedraui, S.A.B. de C.V.'s (BMV:CHDRAUIB) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Grupo Comercial Chedraui. de's (BMV:CHDRAUIB) stock is up by a considerable 10% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Grupo Comercial Chedraui. 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 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 Comercial Chedraui. de

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 Grupo Comercial Chedraui. de is:

7.9% = Mex$2.2b ÷ Mex$28b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.08 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Comercial Chedraui. de's Earnings Growth And 7.9% ROE

It is quite clear that Grupo Comercial Chedraui. de's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 7.9%. Grupo Comercial Chedraui. de's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by8.4% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for CHDRAUI B? You can find out in our latest intrinsic value infographic research report.

Is Grupo Comercial Chedraui. de Efficiently Re-investing Its Profits?

Grupo Comercial Chedraui. de has a low three-year median payout ratio of 22% (or a retention ratio of 78%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, Grupo Comercial Chedraui. de has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 14% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we feel that the performance shown by Grupo Comercial Chedraui. de can be open to many interpretations. 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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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