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Industrias Bachoco, S.A.B. de C.V.'s (NYSE:IBA) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

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Most readers would already be aware that Industrias Bachoco. de's (NYSE:IBA) stock increased significantly by 13% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Industrias Bachoco. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Industrias Bachoco. de

How Is ROE Calculated?

Return on equity 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 Industrias Bachoco. de is:

8.4% = Mex$3.9b ÷ Mex$46b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Industrias Bachoco. de's Earnings Growth And 8.4% ROE

On the face of it, Industrias Bachoco. de's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. As a result, Industrias Bachoco. de's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

With the industry earnings declining at a rate of 1.2% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Industrias Bachoco. de fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Industrias Bachoco. de Efficiently Re-investing Its Profits?

Industrias Bachoco. de's low three-year median payout ratio of 23% (implying that the company keeps77% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, Industrias Bachoco. de has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 1.9% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

On the whole, we feel that the performance shown by Industrias Bachoco. de can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking current analyst estimates, we found that the company's earnings growth rate is expected to see a marginal improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.