El Puerto de Liverpool, S.A.B. de C.V.'s (BMV:LIVEPOLC-1) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 2.7% over the past month, it is easy to disregard El Puerto de Liverpool. de (BMV:LIVEPOLC-1). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to El Puerto de Liverpool. de's ROE today.

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 El Puerto de Liverpool. de

How Do You 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 El Puerto de Liverpool. de is:

14% = Mex$22b ÷ Mex$159b (Based on the trailing twelve months to September 2024).

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$0.14 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 El Puerto de Liverpool. de's Earnings Growth And 14% ROE

On the face of it, El Puerto de Liverpool. de's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 10.0% doesn't go unnoticed by us. Especially when you consider El Puerto de Liverpool. de's exceptional 25% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

When you consider the fact that the industry earnings have shrunk at a rate of 5.1% in the same 5-year period, the company's net income growth is pretty remarkable.

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. What is LIVEPOL C-1 worth today? The intrinsic value infographic in our free research report helps visualize whether LIVEPOL C-1 is currently mispriced by the market.

Is El Puerto de Liverpool. de Efficiently Re-investing Its Profits?

El Puerto de Liverpool. de has a really low three-year median payout ratio of 20%, meaning that it has the remaining 80% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, El Puerto de Liverpool. de has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 29% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with El Puerto de Liverpool. de's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.