Promotora y Operadora de Infraestructura, S. A. B. de C. V.'s (BMV:PINFRA) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Promotora y Operadora de Infraestructura S. A. B. de C. V's (BMV:PINFRA) stock is up by a considerable 11% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Promotora y Operadora de Infraestructura S. A. B. de C. V'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Promotora y Operadora de Infraestructura S. A. B. de C. V

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Promotora y Operadora de Infraestructura S. A. B. de C. V is:

7.9% = Mex$4.1b ÷ Mex$52b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MX$1 worth of shareholders' equity, the company generated MX$0.08 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Promotora y Operadora de Infraestructura S. A. B. de C. V's Earnings Growth And 7.9% ROE

It is quite clear that Promotora y Operadora de Infraestructura S. A. B. de C. V's ROE is rather low. Not just that, even compared to the industry average of 11%, the company's ROE is entirely unremarkable. Therefore, Promotora y Operadora de Infraestructura S. A. B. de C. V's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Promotora y Operadora de Infraestructura S. A. B. de C. V's net income growth with the industry and found that the average industry growth rate was 9.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Promotora y Operadora de Infraestructura S. A. B. de C. V fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Promotora y Operadora de Infraestructura S. A. B. de C. V Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 79% (meaning, the company retains only 21% of profits) for Promotora y Operadora de Infraestructura S. A. B. de C. V suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Promotora y Operadora de Infraestructura S. A. B. de C. V has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 47% over the next three years. The fact that the company's ROE is expected to rise to 10% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on Promotora y Operadora de Infraestructura S. A. B. de C. V. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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.

When trading Promotora y Operadora de Infraestructura S. A. B. de C. V or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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