Fibra Terrafina's (BMV:TERRA13) Stock Is Going Strong: Have Financials A Role To Play?

Fibra Terrafina (BMV:TERRA13) has had a great run on the share market with its stock up by a significant 9.2% over the last week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Fibra Terrafina's ROE in this article.

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.

View our latest analysis for Fibra Terrafina

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 Fibra Terrafina is:

3.6% = Mex$1.0b ÷ Mex$29b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.04 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. 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 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.

Fibra Terrafina's Earnings Growth And 3.6% ROE

It is quite clear that Fibra Terrafina's ROE is rather low. Not just that, even compared to the industry average of 6.0%, the company's ROE is entirely unremarkable. However, the moderate 11% net income growth seen by Fibra Terrafina over the past five years is definitely a positive. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Fibra Terrafina's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.8%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Fibra Terrafina fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fibra Terrafina Efficiently Re-investing Its Profits?

Fibra Terrafina seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 70%, meaning the company retains only 30% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.

Moreover, Fibra Terrafina is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 66% of its profits over the next three years. Regardless, the future ROE for Fibra Terrafina is predicted to rise to 5.7% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Fibra Terrafina has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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