Are the mixed financials of Enel Chile SA (SNSE: ENELCHILE) the reason for its sluggish performance on the stock market?

It’s hard to get excited after looking at the recent performance of Enel Chile (SNSE: ENELCHILE), when its stock has fallen 12% in the past three months. We did, however, decide to study the company’s financial statements to determine if they had anything to do with falling prices. Stock prices are generally determined by a company’s financial performance over the long term, which is why we have decided to pay more attention to the financial performance of the company. In this article, we have decided to focus on the ROE of Enel Chile.

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest analysis for Enel Chile

How is the ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Enel Chile is:

11% = 369 billion Canadian dollars ÷ 3.4 tonnes Canadian dollars (based on the last twelve months to June 2021).

The “return” is the annual profit. This means that for every CLP1 value of equity, the company generated a profit of CLP0.11.

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. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A side-by-side comparison of Enel Chile’s 11% profit growth and ROE

At first glance, Enel Chile’s ROE does not look very promising. However, the fact that the company’s ROE is higher than the industry average ROE of 7.8%, is certainly interesting. But then again, seeing that Enel Chile’s net income has declined by 29% over the past five years makes us think again. Keep in mind that the business has a slightly low ROE. It’s just that the industry’s ROE is lower. Therefore, lower income could also be the result of this.

Then when we compared with the industry, which cut its profits to a rate of 3.2% over the same period, we always found that Enel Chile’s performance was quite dismal, as the company cut its profits faster than the industry.

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. 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 whether Enel Chile is trading high P / E or low P / E, relative to its industry.

Is Enel Chile Efficiently Using Its Retained Earnings?

Enel Chile has a high three-year median payout rate of 51% (i.e. it keeps 49% of its profits). This suggests that the company pays most of its profits as dividends to its shareholders. This partly explains why its profits have declined. The company has only a small reserve of capital to reinvest – a vicious cycle that does not benefit the company in the long run. To know the 3 risks that we have identified for Enel Chile, visit our risk dashboard for free.

Additionally, Enel Chile has been paying dividends for the past five years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer constant dividends even though profits have declined.

Conclusion

All in all, we are a little ambivalent about the performance of Enel Chile. On the one hand, the company has a decent rate of return, however, its earnings growth figure is quite disappointing, and as previously noted, low retained earnings are hampering growth. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

When trading stocks or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest transactions * on stocks, options, futures, forex, bonds and funds from around the world from one integrated account. Promoted

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 shares 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 material. Simply Wall St has no position in the mentioned stocks.
^*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.