Ready To Pass On Grupo Bafar, S.A.B. de C.V. (BMV:BAFARB)? Think Again

Looking at Grupo Bafar. de's (BMV:BAFARB) mostly flat share price movement over the past week, it is easy to think that there’s nothing interesting about the stock. However, its fundamentals look pretty strong which means that its price could rise in the future as markets usually follow the long-term financial performance of a business. In this article, we decided to focus on Grupo Bafar. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Grupo Bafar. de

How Do You Calculate Return On Equity?

ROE 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 Bafar. de is:

15% = Mex$1.1b ÷ Mex$7.7b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every MX$1 worth of shareholders' equity, the company generated MX$0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Bafar. de's Earnings Growth And 15% ROE

When you first look at it, Grupo Bafar. de's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 9.8%, is definitely interesting. This probably goes some way in explaining Grupo Bafar. de's moderate 15% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Grupo Bafar. 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%.

Earnings growth is a huge factor in stock valuation. 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 Bafar. de is trading on a high P/E or a low P/E, relative to its industry.

Is Grupo Bafar. 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.

Summary

In total, we are pretty happy with Grupo Bafar. de's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate 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 will have the 1 risk we have identified for Grupo Bafar. de.

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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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