Profit ratio

Is the mixed finances of Fomento Económico Mexicano, SAB de CV (BMV:FEMSAUBD) the source of the negative sentiment?

Fomento Economico Mexicano. de (BMV:FEMSAUBD) had a tough three months with a 22% drop in its share price. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more on the negatives. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. We will pay particular attention to the Fomento Económico Mexicano. ROE of today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Fomento Económico Mexicano. of

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Fomento Económico Mexicano. of is:

11% = 37 billion ÷ 335 billion pesos (based on the last twelve months until March 2022).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every MX$1 worth of equity, the company was able to make a profit of MX$0.11.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Fomento Economico Mexicano. Earnings growth and ROE of 11%

At first glance, Fomento Económico Mexicano. The ROE of de does not look very promising. However, its ROE is similar to the industry average of 14%, so we won’t dismiss the company entirely. But again, Fomento Económico Mexicano. The five-year net income of de decreased by 19%. Keep in mind that the company has a slightly low ROE. So that’s what could lead to lower earnings growth.

So, in a next step, we compared Fomento Económico Mexicano. relative to the industry and were disappointed to find that while the company cut profits, the industry increased profits at a rate of 6.3% over the same period.

BMV:FEMSA UBD Past Earnings Growth July 9, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Has the market priced in FEMSA UBD’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Is Fomento Económico Mexicano. to make effective use of its benefits?

Despite a normal three-year median payout ratio of 44% (where it retains 56% of its earnings), Fomento Económico Mexicano. de has experienced a decline in profits as seen above. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

In addition, Fomento Económico Mexicano. has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 49%. As a result, the company’s future ROE is also not expected to change much, with analysts forecasting an ROE of 11%.

Conclusion

Overall, we think the performance shown by Fomento Económico Mexicano. de can be open to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.