Does GMéxico Transportes, S.A.B. de C.V.'s (BMV:GMXT) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?

Most readers would already know that GMéxico Transportes. de's (BMV:GMXT) stock increased by 1.3% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. In this article, we decided to focus on GMéxico Transportes. de's ROE.

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 GMéxico Transportes. 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 GMéxico Transportes. de is:

15% = Mex$11b ÷ Mex$72b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.15.

What Has ROE Got To Do With 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 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 GMéxico Transportes. de's Earnings Growth And 15% ROE

When you first look at it, GMéxico Transportes. de's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 14%, so we won't completely dismiss the company. Even so, GMéxico Transportes. de has shown a fairly decent growth in its net income which grew at a rate of 10.0%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared GMéxico Transportes. de's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 19% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is GMXT * worth today? The intrinsic value infographic in our free research report helps visualize whether GMXT * is currently mispriced by the market.

Is GMéxico Transportes. de Using Its Retained Earnings Effectively?

GMéxico Transportes. de has a significant three-year median payout ratio of 97%, meaning that it is left with only 3.4% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, GMéxico Transportes. de is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 80% of its profits over the next three years. However, GMéxico Transportes. de's ROE is predicted to rise to 21% despite there being no anticipated change in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on GMéxico Transportes. de. Although the company has shown a fair bit of growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.