Understanding Key Financial Metrics
As we wrap up the first quarter earnings reports from Mexican market issuers and await the next round of releases, it’s insightful to examine which companies displayed the most noteworthy profitability metrics.
Typically, attention focuses on revenue margins: gross margin, operating margin, net margin, and less formally recognized but widely used margins like the EBITDA margin. These figures indicate how well companies generate revenue above various cost and expense classes, which is crucial. However, these metrics alone don’t account for how invested resources generate returns for owners; thus, other profitability indicators linking these margins to capital invested in the company are necessary.
Among the primary measures available for this purpose are Return on Equity (ROE) and Return on Invested Capital (ROIC).
Return on Equity (ROE)
The ROE is calculated by dividing the accumulated net income over 12 months (four quarters) by average shareholder equity (capital) for the same period.
Breaking down ROE into net margin, asset turnover, and—most importantly—asset-to-equity ratio allows us to observe how a company’s capital structure and operational/financial performance determine its profitability, as measured by ROE. The higher the net income and the lower the proportion of shareholder equity (capital), the greater the ROE.
During Q1 2025, Mexican market issuers collectively had a ROE of 11.5%, marking an 18 basis point (p.b.) decrease year-over-year (a/y).
The issuers belonging to the S&P/BMV IPC index collectively had a ROE of 12.1%, indicating a 31 p.b. decrease a/y. Upon examining various industries, telecommunications services displayed the most significant declines (-751 p.b. a/y), attributed to America Movil’s (AMX) accumulated net income reduction.
Return on Invested Capital (ROIC)
The ROIC is calculated by dividing the accumulated adjusted operating profit less taxes (NOPLAT) over 12 months by average invested capital for the same period.
In our analysis, we modified the traditional ROIC calculation methodology: we excluded the effects of varying company tax burdens and included non-cash outflow items. Essentially, instead of NOPLAT, we used operating profit before interest, taxes, depreciation, and amortization (EBITDA).
This approach allows for some comparison between companies, though caution is advised when contrasting each issuer’s ROIC with their respective Weighted Average Cost of Capital (WACC).
During Q1 2025, Mexican market issuers collectively had a ROIC of 21.2%, marking a 54 p.b. increase a/y. The issuers belonging to the S&P/BMV IPC index collectively had a ROIC of 24.7%, indicating a 100 p.b. increase a/y.
Industry Performance
When observing industry performance, material companies showed the most significant advances (+480 p.b. a/y), while healthcare issuers experienced the most pronounced declines (-410 p.b. a/y).
Both EBITDA margins (21.4% for BMV issuers and 21.5% for IPC index issuers) and capital turnover (0.99x for BMV issuers and 1.15x for IPC index issuers) demonstrated progress, enabling ROIC increases.
Key Questions and Answers
- What are the key profitability metrics analyzed? The article focuses on Return on Equity (ROE) and Return on Invested Capital (ROIC).
- What do ROE and ROIC measure? ROE measures how effectively a company uses shareholder equity to generate profits, while ROIC assesses the returns generated by invested capital.
- How are ROE and ROIC calculated? ROE is the net income divided by average shareholder equity, while ROIC is adjusted operating profit less taxes (NOPLAT) divided by average invested capital.
- What were the overall ROE and ROIC results for Mexican market issuers in Q1 2025? Collectively, Mexican market issuers had a ROE of 11.5% and a ROIC of 21.2%. Issuers belonging to the S&P/BMV IPC index had a ROE of 12.1% and a ROIC of 24.7%.
- Which industries showed the most significant changes in ROE and ROIC? Material companies had notable advances, while healthcare issuers experienced pronounced declines.
