Are Strong Financial Prospects The Force That Is Driving The Momentum In Grupo Cementos de Chihuahua, S.A.B. de C.V.'s BMV:GCC) Stock?

Grupo Cementos de Chihuahua. de (BMV:GCC) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Grupo Cementos de Chihuahua. de's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Grupo Cementos de Chihuahua. de

How To 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 Cementos de Chihuahua. de is:

11% = US$130m ÷ US$1.2b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.11 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.

Grupo Cementos de Chihuahua. de's Earnings Growth And 11% ROE

When you first look at it, Grupo Cementos de Chihuahua. de's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.3% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by Grupo Cementos de Chihuahua. de. 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. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Grupo Cementos de Chihuahua. de's growth is quite high when compared to the industry average growth of 7.9% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for GCC *? You can find out in our latest intrinsic value infographic research report.

Is Grupo Cementos de Chihuahua. de Efficiently Re-investing Its Profits?

Grupo Cementos de Chihuahua. de has a low three-year median payout ratio of 13%, meaning that the company retains the remaining 87% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Grupo Cementos de Chihuahua. de has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 21% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Grupo Cementos de Chihuahua. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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