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Will Grupo Simec SAB de CV (NYSEMKT:SIM) Continue To Underperform Its Industry?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Grupo Simec SAB de CV (NYSEMKT:SIM).

Grupo Simec SAB de CV (NYSEMKT:SIM) delivered a less impressive 5.86% ROE over the past year, compared to the 11.07% return generated by its industry. SIM’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on SIM’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of SIM’s returns. Let me show you what I mean by this. Check out our latest analysis for Grupo Simec. de

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs Grupo Simec. de’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Grupo Simec. de, which is 10.23%. Since Grupo Simec. de’s return does not cover its cost, with a difference of -4.37%, this means its current use of equity is not efficient and not sustainable. Very simply, Grupo Simec. de pays more for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

AMEX:SIM Last Perf June 27th 18
AMEX:SIM Last Perf June 27th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue Grupo Simec. de can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Grupo Simec. de’s debt-to-equity level. At 2.74%, Grupo Simec. de’s debt-to-equity ratio appears low and indicates that Grupo Simec. de still has room to increase leverage and grow its profits.

AMEX:SIM Historical Debt June 27th 18
AMEX:SIM Historical Debt June 27th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Grupo Simec. de’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Grupo Simec. de’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For Grupo Simec. de, there are three relevant aspects you should further examine:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Grupo Simec. de worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Grupo Simec. de is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Grupo Simec. de? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.