Chipotle Mexican Grill, Inc.'s (NYSE:CMG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
February 22, 2022
NYSE:CMG
Source: Shutterstock

Chipotle Mexican Grill (NYSE:CMG) has had a rough three months with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Chipotle Mexican Grill's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Chipotle Mexican Grill

How To Calculate Return On Equity?

Return on equity 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 Chipotle Mexican Grill is:

28% = US$653m ÷ US$2.3b (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.28 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Chipotle Mexican Grill's Earnings Growth And 28% ROE

First thing first, we like that Chipotle Mexican Grill has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. As a result, Chipotle Mexican Grill's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

Given that the industry shrunk its earnings at a rate of 0.7% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
NYSE:CMG Past Earnings Growth February 22nd 2022

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. Is Chipotle Mexican Grill fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chipotle Mexican Grill Efficiently Re-investing Its Profits?

Chipotle Mexican Grill doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with Chipotle Mexican Grill's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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