Are Poor Financial Prospects Dragging Down Megacable Holdings, S. A. B. de C. V. (BMV:MEGACPO Stock?

With its stock down 14% over the past three months, it is easy to disregard Megacable Holdings S. A. B. de C. V (BMV:MEGACPO). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Megacable Holdings S. A. B. de C. V'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Megacable Holdings S. A. B. de C. V

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 Megacable Holdings S. A. B. de C. V is:

7.6% = Mex$2.7b ÷ Mex$35b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.08 in profit.

What Is The Relationship Between ROE And 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 Megacable Holdings S. A. B. de C. V's Earnings Growth And 7.6% ROE

It is hard to argue that Megacable Holdings 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 8.3% either. Given the circumstances, the significant decline in net income by 11% seen by Megacable Holdings S. A. B. de C. V over the last five years is not surprising.

That being said, we compared Megacable Holdings S. A. B. de C. V's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. 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 Megacable Holdings S. A. B. de C. V is trading on a high P/E or a low P/E, relative to its industry.

Is Megacable Holdings S. A. B. de C. V Efficiently Re-investing Its Profits?

Megacable Holdings S. A. B. de C. V has a high three-year median payout ratio of 76% (that is, it is retaining 24% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Megacable Holdings S. A. B. de C. V.

Moreover, Megacable Holdings S. A. B. de C. V has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 66%. Still, forecasts suggest that Megacable Holdings S. A. B. de C. V's future ROE will rise to 11% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Megacable Holdings S. A. B. de C. V. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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.