Has El Puerto de Liverpool, S.A.B. de C.V.'s (BMV:LIVEPOLC-1) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

El Puerto de Liverpool. de's (BMV:LIVEPOLC-1) stock is up by a considerable 26% over the past three months. 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 El Puerto de Liverpool. de's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for El Puerto de Liverpool. de

How To Calculate Return On Equity?

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 El Puerto de Liverpool. de is:

3.4% = Mex$3.6b ÷ Mex$105b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.03.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

El Puerto de Liverpool. de's Earnings Growth And 3.4% ROE

It is quite clear that El Puerto de Liverpool. de's ROE is rather low. Even compared to the average industry ROE of 4.7%, the company's ROE is quite dismal. Therefore, El Puerto de Liverpool. de's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that El Puerto de Liverpool. de's growth figure is a bit better than the industry which has been shrinking at a rate of 0.2% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 El Puerto de Liverpool. de is trading on a high P/E or a low P/E, relative to its industry.

Is El Puerto de Liverpool. de Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 21% over the next three years. Regardless, the future ROE for El Puerto de Liverpool. de is speculated to rise to 9.1% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, it does look like El Puerto de Liverpool. de 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. 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. 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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