Accel, S.A.B. de C.V.'s (BMV:ACCELSAB) Stock Price Has Stayed Flat But Financial Prospects Look Decent: Can The Market Catch Up?

Accel. de's (BMV:ACCELSAB) stock was mostly flat over the past week. However, its worth giving the company a closer given that its key financial performance indicators aren't particularly bad and long-term financial health is usually what drive market prices. In this article, we decided to focus on Accel. de's ROE.

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.

See our latest analysis for Accel. de

How To 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 Accel. de is:

5.6% = Mex$310m ÷ Mex$5.6b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.06 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. 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.

A Side By Side comparison of Accel. de's Earnings Growth And 5.6% ROE

It is hard to argue that Accel. de's ROE is much good in and of itself. Even compared to the average industry ROE of 9.8%, the company's ROE is quite dismal. Although, we can see that Accel. de saw a modest net income growth of 19% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. 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 Accel. 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 5.2%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Accel. de is trading on a high P/E or a low P/E, relative to its industry.

Is Accel. de Efficiently Re-investing Its Profits?

Summary

On the whole, we do feel that Accel. de has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Accel. de visit our risks dashboard for free.

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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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