Yahoo Finance Queen's Road Capital Investment Ltd.'s (TSE:QRC) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Queen's Road Capital Investment's (TSE:QRC) stock is up by a considerable 23% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, 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. In this article, we decided to focus on Queen's Road Capital Investment'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Queen's Road Capital Investment
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 Queen's Road Capital Investment is:
13% = US$35m ÷ US$264m (Based on the trailing twelve months to November 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 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 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.
Queen's Road Capital Investment's Earnings Growth And 13% ROE
At first glance, Queen's Road Capital Investment seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.0%. However, for some reason, the higher returns aren't reflected in Queen's Road Capital Investment's meagre five year net income growth average of 3.3%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
We then compared Queen's Road Capital Investment's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 28% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is QRC fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Queen's Road Capital Investment Efficiently Re-investing Its Profits?
A low LTM (or last twelve month) payout ratio of 18% (implying that the company retains the remaining 82% of its income) suggests that Queen's Road Capital Investment is retaining most of its profits. This should be reflected in its earnings growth number, but that's not the case. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Queen's Road Capital Investment started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.
Conclusion
In total, it does look like Queen's Road Capital Investment has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Queen's Road Capital Investment by visiting our risks dashboard for free on our platform here.
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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.
