Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) has had a great run on the share market with its stock up by a significant 12% over the last month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Grupo Aeroportuario del Centro Norte. de’s ROE in this article.
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.
How Is ROE Calculated?
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 Grupo Aeroportuario del Centro Norte. de is:
10% = Mex$1.1b ÷ Mex$11b (Based on the trailing twelve months to December 2020).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every MX$1 of its shareholder’s investments, the company generates a profit of MX$0.10.
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.
Grupo Aeroportuario del Centro Norte. de’s Earnings Growth And 10% ROE
At first glance, Grupo Aeroportuario del Centro Norte. de’s ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 8.4% which we definitely can’t overlook. This certainly adds some context to Grupo Aeroportuario del Centro Norte. de’s moderate 10% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
We then compared Grupo Aeroportuario del Centro Norte. 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 5.4% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Grupo Aeroportuario del Centro Norte. de’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Grupo Aeroportuario del Centro Norte. de Using Its Retained Earnings Effectively?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 120% over the next three years. Regardless, the future ROE for Grupo Aeroportuario del Centro Norte. de is speculated to rise to 25% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
On the whole, we do feel that Grupo Aeroportuario del Centro Norte. de has some positive attributes. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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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