Is Operadora de Sites Mexicanos, S.A.B. de C.V.'s (BMV:SITES1A-1) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 14% over the past three months, it is easy to disregard Operadora de Sites Mexicanos. de (BMV:SITES1A-1). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Operadora de Sites Mexicanos. 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Operadora de Sites Mexicanos. de

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 Operadora de Sites Mexicanos. de is:

1.9% = Mex$859m ÷ Mex$46b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.02 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Operadora de Sites Mexicanos. de's Earnings Growth And 1.9% ROE

As you can see, Operadora de Sites Mexicanos. de's ROE looks pretty weak. Even compared to the average industry ROE of 7.9%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Operadora de Sites Mexicanos. de grew its net income at a significant rate of 26% in the last five years. 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.

We then performed a comparison between Operadora de Sites Mexicanos. de's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 30% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SITES1 A-1 worth today? The intrinsic value infographic in our free research report helps visualize whether SITES1 A-1 is currently mispriced by the market.

Is Operadora de Sites Mexicanos. de Efficiently Re-investing Its Profits?

The really high LTM (or last twelve month) payout ratio of 381% for Operadora de Sites Mexicanos. de suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 2 risks we have identified for Operadora de Sites Mexicanos. de visit our risks dashboard for free.

While Operadora de Sites Mexicanos. de has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 165% over the next three years. The fact that the company's ROE is expected to rise to 6.8% over the same period is explained by the drop in the payout ratio.

Conclusion

On the whole, we feel that the performance shown by Operadora de Sites Mexicanos. de can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com