Medicare Group Q.P.S.C.'s (DSM:MCGS) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Medicare Group Q.P.S.C (DSM:MCGS) has had a great run on the share market with its stock up by a significant 5.7% over the last month. 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. Specifically, we decided to study Medicare Group Q.P.S.C's ROE in this article.

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.

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

How Do You Calculate Return On Equity?

Return on equity 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:

8.3% = ر.ق86m ÷ ر.ق1.0b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. That means that for every QAR1 worth of shareholders' equity, the company generated QAR0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Medicare Group Q.P.S.C's Earnings Growth And 8.3% ROE

It is quite clear that Medicare Group Q.P.S.C's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.1%. Therefore, it might not be wrong to say that the five year net income decline of 9.2% seen by Medicare Group Q.P.S.C was possibly a result of the disappointing ROE.

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 7.3% 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. 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 Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 101% (implying that -0.8% of the profits are retained), most of Medicare Group Q.P.S.C's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Medicare Group Q.P.S.C.

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. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. 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.

If you decide to trade Medicare Group Q.P.S.C, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.