Grupo Aeroportuario del Centro Norte. de's (BMV:OMAB) stock is up by a considerable 13% 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. In this article, we decided to focus on Grupo Aeroportuario del Centro Norte. 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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 Grupo Aeroportuario del Centro Norte. de is:
25% = Mex$2.9b ÷ Mex$11b (Based on the trailing twelve months to December 2021).
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$0.25 in profit.
What Has ROE Got To Do With 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 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.
Grupo Aeroportuario del Centro Norte. de's Earnings Growth And 25% ROE
At first glance, Grupo Aeroportuario del Centro Norte. de seems to have a decent ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. As you might expect, the 2.5% net income decline reported by Grupo Aeroportuario del Centro Norte. de is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then compared Grupo Aeroportuario del Centro Norte. de's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 3.5% in the same period. This does offer shareholders some relief
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 OMA B worth today? The intrinsic value infographic in our free research report helps visualize whether OMA B is currently mispriced by the market.
Is Grupo Aeroportuario del Centro Norte. de Efficiently Re-investing Its Profits?
Grupo Aeroportuario del Centro Norte. de's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 55% (or a retention ratio of 45%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.
In addition, Grupo Aeroportuario del Centro Norte. de has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 79% over the next three years. However, Grupo Aeroportuario del Centro Norte. de's future ROE is expected to rise to 34% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.
On the whole, we do feel that Grupo Aeroportuario del Centro Norte. de has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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.