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Declining Stock and Decent Financials: Is The Market Wrong About Grupo Vasconia, S.A.B. (BMV:VASCONI)?

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It is hard to get excited after looking at Grupo Vasconia’s (BMV:VASCONI) recent performance, when its stock has declined 23% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Grupo Vasconia’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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Grupo Vasconia

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Grupo Vasconia is:

8.2% = Mex$178m ÷ Mex$2.2b (Based on the trailing twelve months to March 2022).

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$0.08 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Grupo Vasconia’s Earnings Growth And 8.2% ROE

It is quite clear that Grupo Vasconia’s ROE is rather low. A comparison with the industry shows that the company’s ROE is pretty similar to the average industry ROE of 8.2%. Looking at Grupo Vasconia’s exceptional 43% five-year net income growth in particular, we are definitely impressed. Considering the low ROE, it is quite possible that there might also be some other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

When you consider the fact that the industry earnings have shrunk at a rate of 4.1% in the same period, the company’s net income growth is pretty remarkable.

past-earnings-growth
BMV:VASCONI * Past Earnings Growth May 18th 2022

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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Grupo Vasconia’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Grupo Vasconia Efficiently Re-investing Its Profits?

Grupo Vasconia’s ‘ three-year median payout ratio is on the lower side at 13% implying that it is retaining a higher percentage (87%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Grupo Vasconia is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we do feel that Grupo Vasconia has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Grupo Vasconia.

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.

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