Is Weakness In QUALCOMM Incorporated (NASDAQ:QCOM) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 9.4% over the past month, it is easy to disregard QUALCOMM (NASDAQ:QCOM). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on QUALCOMM's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for QUALCOMM
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 QUALCOMM is:
63% = US$12b ÷ US$19b (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.63.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of QUALCOMM's Earnings Growth And 63% ROE
To begin with, QUALCOMM has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. Under the circumstances, QUALCOMM's considerable five year net income growth of 54% was to be expected.
Next, on comparing with the industry net income growth, we found that QUALCOMM's growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for QCOM? You can find out in our latest intrinsic value infographic research report.
Is QUALCOMM Efficiently Re-investing Its Profits?
QUALCOMM's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like QUALCOMM is reinvesting its earnings efficiently.
Besides, QUALCOMM has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. Regardless, QUALCOMM's ROE is speculated to decline to 37% despite there being no anticipated change in its payout ratio.
Conclusion
In total, we are pretty happy with QUALCOMM'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 substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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