GMéxico Transportes, S.A.B. de C.V. (BMV:GMXT) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

GMéxico Transportes. de (BMV:GMXT) has had a rough week with its share price down 5.6%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. 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.

Check out our latest analysis for GMéxico Transportes. 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 GMéxico Transportes. de is:

17% = Mex$11b ÷ Mex$65b (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$0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

GMéxico Transportes. de's Earnings Growth And 17% ROE

To start with, GMéxico Transportes. de's ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. This probably goes some way in explaining GMéxico Transportes. de's moderate 11% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that GMéxico Transportes. de's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is GMXT * fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is GMéxico Transportes. de Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 89% (or a retention ratio of 11%) for GMéxico Transportes. de suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, GMéxico Transportes. de is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 86% of its profits over the next three years. Still, forecasts suggest that GMéxico Transportes. de's future ROE will rise to 21% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like GMéxico Transportes. de has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.