Chipotle Mexican Grill, Inc.'s (NYSE:CMG) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

By
Simply Wall St
Published
January 25, 2021
NYSE:CMG

Chipotle Mexican Grill's (NYSE:CMG) stock is up by a considerable 14% 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. Specifically, we decided to study Chipotle Mexican Grill's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Chipotle Mexican Grill

How Do You 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 Chipotle Mexican Grill is:

13% = US$237m ÷ US$1.8b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.13.

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.

Chipotle Mexican Grill's Earnings Growth And 13% ROE

To begin with, Chipotle Mexican Grill seems to have a respectable ROE. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Chipotle Mexican Grill in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Chipotle Mexican Grill's net income growth with the industry and discovered that the industry saw an average growth of 4.2% in the same period.

past-earnings-growth
NYSE:CMG Past Earnings Growth January 25th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Chipotle Mexican Grill is trading on a high P/E or a low P/E, relative to its industry.

Is Chipotle Mexican Grill Making Efficient Use Of Its Profits?

Conclusion

In total, it does look like Chipotle Mexican Grill has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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.
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