Is Quálitas Controladora, S.A.B. de C.V.'s(BMV:Q) Recent Stock Performance Tethered To Its Strong Fundamentals?

Quálitas Controladora. de (BMV:Q) has had a great run on the share market with its stock up by a significant 22% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Quálitas Controladora. de's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Quálitas Controladora. de

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Quálitas Controladora. de is:

36% = Mex$6.8b ÷ Mex$19b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. So, this means that for every MX$1 of its shareholder's investments, the company generates a profit of MX$0.36.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all 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 when compared to companies that don't have the same features.

Quálitas Controladora. de's Earnings Growth And 36% ROE

To begin with, Quálitas Controladora. de has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. Under the circumstances, Quálitas Controladora. de's considerable five year net income growth of 43% was to be expected.

Next, on comparing with the industry net income growth, we found that Quálitas Controladora. de's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Quálitas Controladora. de fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Quálitas Controladora. de Efficiently Re-investing Its Profits?

Quálitas Controladora. de has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, Quálitas Controladora. de has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 76% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 18%) over the same period.

Conclusion

On the whole, we feel that Quálitas Controladora. de's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.

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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.
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