Grupo Nacional Provincial, S.A.B.'s (BMV:GNP) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

By
Simply Wall St
Published
November 09, 2021
BMV:GNP *
Source: Shutterstock

Grupo Nacional Provincial's (BMV:GNP) stock is up by a considerable 7.2% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Grupo Nacional Provincial's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Grupo Nacional Provincial

How Is ROE Calculated?

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 Nacional Provincial is:

14% = Mex$2.5b ÷ Mex$17b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.14 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Grupo Nacional Provincial's Earnings Growth And 14% ROE

At first glance, Grupo Nacional Provincial's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 14%, we may spare it some thought. Even so, Grupo Nacional Provincial has shown a fairly decent growth in its net income which grew at a rate of 10%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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.

Next, on comparing with the industry net income growth, we found that Grupo Nacional Provincial's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.

past-earnings-growth
BMV:GNP * Past Earnings Growth November 10th 2021

Earnings growth is a huge factor in stock valuation. 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. Is Grupo Nacional Provincial fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Grupo Nacional Provincial Making Efficient Use Of Its Profits?

Grupo Nacional Provincial has a healthy combination of a moderate three-year median payout ratio of 50% (or a retention ratio of 50%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Grupo Nacional Provincial has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Grupo Nacional Provincial certainly does have some positive factors to consider. 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 Grupo Nacional Provincial visit our risks dashboard for free.

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