Do Fundamentals Have Any Role To Play In Driving Grupo Gigante, S. A. B. de C. V.'s (BMV:GIGANTE) Stock Up Recently?

Grupo Gigante S. A. B. de C. V's (BMV:GIGANTE) stock up by 4.6% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, 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. Particularly, we will be paying attention to Grupo Gigante S. A. B. de C. V's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Grupo Gigante S. A. B. de C. V

How Is ROE Calculated?

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 Grupo Gigante S. A. B. de C. V is:

9.2% = Mex$2.3b ÷ Mex$25b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.09 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Grupo Gigante S. A. B. de C. V's Earnings Growth And 9.2% ROE

As you can see, Grupo Gigante S. A. B. de C. V's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 9.4% either. However, the exceptional 26% net income growth seen by Grupo Gigante S. A. B. de C. V over the past five years is pretty remarkable. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. 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.

Next, on comparing with the industry net income growth, we found that Grupo Gigante S. A. B. de C. V's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Grupo Gigante S. A. B. de C. V is trading on a high P/E or a low P/E, relative to its industry.

Is Grupo Gigante S. A. B. de C. V Efficiently Re-investing Its Profits?

Given that Grupo Gigante S. A. B. de C. V doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, it does look like Grupo Gigante S. A. B. de C. V has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Grupo Gigante S. A. B. de C. V by visiting our risks dashboard for free on our platform here.

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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.