Can Mixed Financials Have A Negative Impact on Corporación Moctezuma, S.A.B. de C.V.'s 's (BMV:CMOCTEZ) Current Price Momentum?

Corporación Moctezuma. de's (BMV:CMOCTEZ) stock is up by 5.5% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on Corporación Moctezuma. de's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Corporación Moctezuma. de

How To Calculate Return On Equity?

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 Corporación Moctezuma. de is:

38% = Mex$4.0b ÷ Mex$10b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.38 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Corporación Moctezuma. de's Earnings Growth And 38% ROE

First thing first, we like that Corporación Moctezuma. de has an impressive ROE. Secondly, even when compared to the industry average of 6.3% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in Corporación Moctezuma. de's meagre five year net income growth average of 2.8%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Corporación Moctezuma. de's reported growth was lower than the industry growth of 7.9% in the same period, which is not something we like to see.

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

Is Corporación Moctezuma. de Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 99% (or a retention ratio of 0.7%), most of Corporación Moctezuma. de's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Corporación Moctezuma. de has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we have mixed feelings about Corporación Moctezuma. de. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Corporación Moctezuma. de by visiting our risks dashboard for free on our platform here.

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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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