Are Strong Financial Prospects The Force That Is Driving The Momentum In Megacable Holdings, S. A. B. de C. V.'s BMV:MEGACPO) Stock?

Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) stock is up by a considerable 11% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Megacable Holdings 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

14% = Mex$4.5b ÷ Mex$33b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MX$1 worth of shareholders' equity, the company generated MX$0.14 in profit.

What Has ROE Got To Do With 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 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.

Megacable Holdings S. A. B. de C. V's Earnings Growth And 14% ROE

On the face of it, Megacable Holdings S. A. B. de C. V's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 8.8% which we definitely can't overlook. This certainly adds some context to Megacable Holdings S. A. B. de C. V's moderate 6.5% net income growth seen over the past five years. 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. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Megacable Holdings S. A. B. de C. V's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Megacable Holdings S. A. B. de C. V's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Megacable Holdings S. A. B. de C. V Using Its Retained Earnings Effectively?

Megacable Holdings S. A. B. de C. V has a healthy combination of a moderate three-year median payout ratio of 40% (or a retention ratio of 60%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Megacable Holdings S. A. B. de C. V has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. Accordingly, forecasts suggest that Megacable Holdings S. A. B. de C. V's future ROE will be 12% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Megacable Holdings S. A. B. de C. V'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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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