Is Operadora de Sites Mexicanos, S.A.B. de C.V.'s (BMV:SITES1A-1) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 21% over the past month, it is easy to disregard Operadora de Sites Mexicanos. de (BMV:SITES1A-1). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. 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 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 Operadora de Sites Mexicanos. de

How To 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 Operadora de Sites Mexicanos. de is:

2.4% = Mex$1.1b ÷ Mex$46b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made 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 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.

Operadora de Sites Mexicanos. de's Earnings Growth And 2.4% ROE

As you can see, Operadora de Sites Mexicanos. de's ROE looks pretty weak. Even compared to the average industry ROE of 7.8%, 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 38% 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.

Next, on comparing with the industry net income growth, we found that Operadora de Sites Mexicanos. de's growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Operadora de Sites Mexicanos. de's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Operadora de Sites Mexicanos. de Making Efficient Use Of Its Profits?

Operadora de Sites Mexicanos. de has very a high LTM (or last twelve month) payout ratio of 256% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Despite this, the company's earnings grew 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.

Besides, Operadora de Sites Mexicanos. de has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 113% over the next three years. The fact that the company's ROE is expected to rise to 5.4% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we have mixed feelings about Operadora de Sites Mexicanos. de. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.