Quálitas Controladora, S.A.B. de C.V.'s (BMV:Q) Has Performed Well But Fundamentals Look Varied: Is There A Clear Direction For The Stock?

Quálitas Controladora. de's (BMV:Q) stock is up by 3.7% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Quálitas Controladora. de's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Quálitas Controladora. de

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

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

12% = Mex$2.4b ÷ Mex$20b (Based on the trailing twelve months to March 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Quálitas Controladora. de's Earnings Growth And 12% ROE

At first glance, Quálitas Controladora. de's ROE doesn't look very promising. 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 19%. Therefore, Quálitas Controladora. de's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Quálitas Controladora. de's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is Q * worth today? The intrinsic value infographic in our free research report helps visualize whether Q * is currently mispriced by the market.

Is Quálitas Controladora. de Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 31% (meaning the company retains69% of profits) in the last three-year period, Quálitas Controladora. de's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Quálitas Controladora. de has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 85% over the next three years. Still, forecasts suggest that Quálitas Controladora. de's future ROE will rise to 24% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that the performance shown by Quálitas Controladora. 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 at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. We provide commentary based on historical data and analyst forecasts only using an 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 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.