Grupo Empresarial San José (BME:GSJ) had a difficult week with its share price down 10%. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In this article, we decided to focus on the ROE of Grupo Empresarial San José.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Grupo Empresarial San José

How is ROE calculated?

The ROE formula is:

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

So, based on the above formula, the ROE for Grupo Empresarial San José is:

7.5% = €14m ÷ €193m (based on the last twelve months until March 2022).

The “return” is the annual profit. Another way to think about this is that for every $1 of equity, the company was able to make a profit of $0.07.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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.

Profit growth and 7.5% ROE of Grupo Empresarial San José

At first glance, the ROE of Grupo Empresarial San José does not have much to say. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 15%. However, we are pleasantly surprised to see that Grupo Empresarial San José has increased its net profit at a significant rate of 21% over the past five years. We feel there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.

We then performed a comparison between Grupo Empresarial San José’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 21% over the of the same period.

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. A 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 outlook. So, you might want to check if Grupo Empresarial San José is trading on a high P/E or a low P/E, relative to its industry.

Does Grupo Empresarial San José use its profits efficiently?

Grupo Empresarial San José has a three-year median payout ratio of 29% (where it keeps 71% of its revenue), which is neither too low nor too high. On the face of it, the dividend is well covered and Grupo Empresarial San José is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.

While Grupo Empresarial San José has increased its profits, it only recently started paying dividends, which likely means the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 25%. However, Grupo Empresarial San José’s ROE is expected to reach 13% despite no expected change in its payout ratio.

Summary

Overall, we feel that Grupo Empresarial San José has positive attributes. Even despite the low rate of return, the company posted impressive earnings growth thanks to massive reinvestment in its business. The latest forecasts from industry analysts show that the company should maintain its current growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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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.