Will Weakness in Grupo Comercial Chedraui, S.A.B. de C.V.'s (BMV:CHDRAUIB) Stock Prove Temporary Given Strong Fundamentals?

Simply Wall St · 10/17 16:21

With its stock down 7.0% over the past month, it is easy to disregard Grupo Comercial Chedraui. de (BMV:CHDRAUIB). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Grupo Comercial Chedraui. de'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Grupo Comercial Chedraui. de

How Do You 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 Comercial Chedraui. de is:

17% = Mex$8.4b ÷ Mex$48b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.17 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. 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.

A Side By Side comparison of Grupo Comercial Chedraui. de's Earnings Growth And 17% ROE

To begin with, Grupo Comercial Chedraui. de seems to have a respectable ROE. Even when compared to the industry average of 19% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 35% seen over the past five years by Grupo Comercial Chedraui. de. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Grupo Comercial Chedraui. de's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year period.

past-earnings-growth
BMV:CHDRAUI B Past Earnings Growth October 17th 2024

Earnings growth is an important metric to consider when valuing a stock. 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. What is CHDRAUI B worth today? The intrinsic value infographic in our free research report helps visualize whether CHDRAUI B is currently mispriced by the market.

Is Grupo Comercial Chedraui. de Using Its Retained Earnings Effectively?

Grupo Comercial Chedraui. de has a really low three-year median payout ratio of 14%, meaning that it has the remaining 86% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Grupo Comercial Chedraui. de 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 26% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Grupo Comercial Chedraui. de's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.