Industrias CH, S. A. B. de C. V.'s (BMV:ICHB) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 6.2% over the past three months, it is easy to disregard Industrias CH S. A. B. de C. V (BMV:ICHB). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Industrias CH S. A. B. de C. V's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

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

15% = Mex$11b ÷ Mex$69b (Based on the trailing twelve months to September 2024).

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

What Is The Relationship Between ROE And 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 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 Industrias CH S. A. B. de C. V's Earnings Growth And 15% ROE

When you first look at it, Industrias CH S. A. B. de C. V's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 9.9% doesn't go unnoticed by us. Particularly, the substantial 26% net income growth seen by Industrias CH S. A. B. de C. V over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. 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 Industrias CH S. A. B. de C. V's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

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. Is Industrias CH S. A. B. de C. V fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Industrias CH S. A. B. de C. V Using Its Retained Earnings Effectively?

Industrias CH S. A. B. de C. V doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, we are pretty happy with Industrias CH S. A. B. de C. V's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate.

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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.