Is Weakness In Q & M Dental Group (Singapore) Limited (SGX:QC7) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 1.1% over the past month, it is easy to disregard Q & M Dental Group (Singapore) (SGX:QC7). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Q & M Dental Group (Singapore)'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Q & M Dental Group (Singapore)

How Do You 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 Q & M Dental Group (Singapore) is:

16% = S$19m ÷ S$115m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.16.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Q & M Dental Group (Singapore)'s Earnings Growth And 16% ROE

To start with, Q & M Dental Group (Singapore)'s ROE looks acceptable. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Q & M Dental Group (Singapore) in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Q & M Dental Group (Singapore)'s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 0.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Q & M Dental Group (Singapore)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Q & M Dental Group (Singapore) Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 42% (implying that the company keeps 58% of its income) over the last three years, Q & M Dental Group (Singapore) has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Q & M Dental Group (Singapore) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. Accordingly, forecasts suggest that Q & M Dental Group (Singapore)'s future ROE will be 16% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Q & M Dental Group (Singapore)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount 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 Q & M Dental Group (Singapore)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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