Industrias CH, S. A. B. de C. V.'s (BMV:ICHB) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Industrias CH S. A. B. de C. V's (BMV:ICHB) recent performance, when its stock has declined 4.8% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Industrias CH S. A. B. de C. V's ROE today.

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

Check out our latest analysis for Industrias CH S. A. B. de C. V

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 Industrias CH S. A. B. de C. V is:

6.7% = Mex$4.1b ÷ Mex$61b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.07.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Industrias CH S. A. B. de C. V's Earnings Growth And 6.7% ROE

It is hard to argue that Industrias CH S. A. B. de C. V's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 6.3% either. However, the exceptional 30% net income growth seen by Industrias CH S. A. B. de C. V over the past five years is pretty remarkable. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Industrias CH S. A. B. de C. V's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 30% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Industrias CH S. A. B. de C. V is trading on a high P/E or a low P/E, relative to its industry.

Is Industrias CH S. A. B. de C. V Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

Overall, we feel that Industrias CH S. A. B. de C. V 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Industrias CH S. A. B. de C. V's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.