Is the poor financial outlook weighing on Compañía Cervecerías Unidas SA (SNSE: CCU Stock?

With its stock down 3.5% over the past month, it’s easy to overlook Compañía Cervecerías Unidas (SNSE: CCU). Since stock prices are usually determined by a company’s long-term fundamentals, which in this case seem quite weak, we decided to study the key financial indicators of the company. In this article we have decided to focus on the ROE of Compañía Cervecerías Unidas.

Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest review for Compañía Cervecerías Unidas

How to calculate return on equity?

the return on equity formula is:

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

Thus, based on the above formula, the ROE of Compañía Cervecerías Unidas is:

13% = 200 billion Canadian dollars ÷ 1.5 tonnes of Canadian dollars (based on the last twelve months up to September 2021).

The “return” is the income the business has earned over the past year. This means that for every CLP1 value of equity, the company generated CLP 0.13 of profit.

Why is ROE important for profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate than companies that do not have the same characteristics.

Profit growth of Compañía Cervecerías Unidas and 13% of ROE

At first glance, the ROE of the Compañía Cervecerías Unidas is not much to say. Still, further study shows that the company’s ROE is similar to the industry average of 12%. However, Compañía Cervecerías Unidas has seen flat growth in its net income over the past five years, which doesn’t mean much. Keep in mind that the company’s ROE is not particularly good to begin with. So this could also be one of the reasons for the company’s flat profit growth.

As a next step, we compared Compañía Cervecerías Unidas’ net income growth with that of the industry and found that the industry experienced an average growth of 8.8% over the same period.

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about Compañía Cervecerías Unidas’ valuation, take a look at this gauge of its price / earnings ratio, relative to its industry.

Does Compañía Cervecerías Unidas use its retained earnings efficiently?

Compañía Cervecerías Unidas has a high three-year median payout rate of 75% (or retention rate of 25%), which means the company pays out most of its profits as dividends to its shareholders. This partly explains why there has been no growth in its profits.

Additionally, Compañía Cervecerías Unidas has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 79%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 14%.

Summary

Overall, we would be extremely careful before making a decision on Compañía Cervecerías Unidas. The company has experienced a lack of earnings growth due to keeping very little earnings and what little it keeps is being reinvested at a very low rate of return. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.