El Puerto de Liverpool, S.A.B. de C.V.'s (BMV:LIVEPOLC-1) Stock Is Going Strong: Is the Market Following Fundamentals?

El Puerto de Liverpool. de (BMV:LIVEPOLC-1) has had a great run on the share market with its stock up by a significant 26% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to El Puerto de Liverpool. de'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for El Puerto de Liverpool. de

How To Calculate Return On Equity?

ROE 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 El Puerto de Liverpool. de is:

13% = Mex$20b ÷ Mex$147b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every MX$1 worth of shareholders' equity, the company generated MX$0.13 in profit.

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. 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 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 El Puerto de Liverpool. de's Earnings Growth And 13% ROE

On the face of it, El Puerto de Liverpool. de's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 8.9%, is definitely interesting. This probably goes some way in explaining El Puerto de Liverpool. de's moderate 16% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. 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.

We then compared El Puerto de Liverpool. de's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.1% in the same 5-year period.

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. Has the market priced in the future outlook for LIVEPOL C-1? You can find out in our latest intrinsic value infographic research report.

Is El Puerto de Liverpool. de Making Efficient Use Of Its Profits?

El Puerto de Liverpool. de has a low three-year median payout ratio of 20%, meaning that the company retains the remaining 80% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, El Puerto de Liverpool. de has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 21%. As a result, El Puerto de Liverpool. de's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Conclusion

Overall, we are quite pleased with El Puerto de Liverpool. de's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.