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

With its stock down 6.3% over the past three months, it is easy to disregard Megacable Holdings S. A. B. de C. V (BMV:MEGACPO). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. 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 key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

How To Calculate Return On Equity?

The formula for ROE is:

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:

8.2% = Mex$3.0b ÷ Mex$37b (Based on the trailing twelve months to March 2024).

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$0.08.

Why Is ROE Important For Earnings Growth?

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

Megacable Holdings S. A. B. de C. V's Earnings Growth And 8.2% ROE

It is hard to argue that Megacable Holdings S. A. B. de C. V's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 9.6%. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by Megacable Holdings S. A. B. de C. V was possibly a result of the disappointing ROE.

So, as a next step, we compared Megacable Holdings S. A. B. de C. V's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 10% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 71% (implying that 29% of the profits are retained), most of Megacable Holdings S. A. B. de C. V's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Megacable Holdings S. A. B. de C. V by visiting our risks dashboard for free on our platform here.

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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 70%. Regardless, the future ROE for Megacable Holdings S. A. B. de C. V is predicted to rise to 11% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, Megacable Holdings S. A. B. de C. V's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.

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