It is hard to get excited after looking at Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) recent performance, when its stock has declined 6.3% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Megacable Holdings S. A. B. de C. V's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You 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:
13% = Mex$4.4b ÷ Mex$34b (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.13.
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. 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. 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 13% 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 11% which we definitely can't overlook. Yet, Megacable Holdings S. A. B. de C. V has posted measly growth of 3.0% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.
Next, on comparing with the industry net income growth, we found that Megacable Holdings S. A. B. de C. V's reported growth was lower than the industry growth of 3.8% in the same period, which is not something we like 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). 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 Making Efficient Use Of Its Profits?
While Megacable Holdings S. A. B. de C. V has a decent three-year median payout ratio of 39% (or a retention ratio of 61%), it has seen very little growth in earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Moreover, Megacable Holdings S. A. B. de C. V has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 49% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Overall, we feel that Megacable Holdings S. A. B. de C. V certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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