Medicare Group Q.P.S.C.'s (DSM:MCGS) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Medicare Group Q.P.S.C (DSM:MCGS) has had a great run on the share market with its stock up by a significant 17% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Medicare Group Q.P.S.C's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Medicare Group Q.P.S.C

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Medicare Group Q.P.S.C is:

8.5% = ر.ق84m ÷ ر.ق990m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.08 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Medicare Group Q.P.S.C's Earnings Growth And 8.5% ROE

It is hard to argue that Medicare Group Q.P.S.C's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 8.9%. Given the circumstances, the significant decline in net income by 14% seen by Medicare Group Q.P.S.C over the last five years is not surprising.

So, as a next step, we compared Medicare Group Q.P.S.C's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.1% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Medicare Group Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Medicare Group Q.P.S.C Efficiently Re-investing Its Profits?

Medicare Group Q.P.S.C's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 101% (or a retention ratio of -1.0%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Moreover, Medicare Group Q.P.S.C 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.

Summary

In total, we would have a hard think before deciding on any investment action concerning Medicare Group Q.P.S.C. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. To gain further insights into Medicare Group Q.P.S.C's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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