Do Fundamentals Have Any Role To Play In Driving Vodafone Qatar P.Q.S.C.'s (DSM:VFQS) Stock Up Recently?

Most readers would already know that Vodafone Qatar P.Q.S.C's (DSM:VFQS) stock increased by 3.9% over the past week. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Vodafone Qatar P.Q.S.C's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Vodafone Qatar P.Q.S.C

How Is ROE Calculated?

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 Vodafone Qatar P.Q.S.C is:

12% = ر.ق560m ÷ ر.ق4.8b (Based on the trailing twelve months to September 2023).

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 QAR0.12 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. 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.

Vodafone Qatar P.Q.S.C's Earnings Growth And 12% ROE

It is quite clear that Vodafone Qatar P.Q.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 12%. However, the exceptional 36% net income growth seen by Vodafone Qatar P.Q.S.C over the past five years is pretty remarkable. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Vodafone Qatar P.Q.S.C's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.1%.

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. What is VFQS worth today? The intrinsic value infographic in our free research report helps visualize whether VFQS is currently mispriced by the market.

Is Vodafone Qatar P.Q.S.C Using Its Retained Earnings Effectively?

Vodafone Qatar P.Q.S.C's significant three-year median payout ratio of 77% (where it is retaining only 23% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Vodafone Qatar P.Q.S.C has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 89%. Accordingly, forecasts suggest that Vodafone Qatar P.Q.S.C's future ROE will be 12% which is again, similar to the current ROE.

Summary

Overall, we feel that Vodafone Qatar P.Q.S.C certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.