Are QANTM Intellectual Property Limited's (ASX:QIP) Mixed Financials Driving The Negative Sentiment?

Simply Wall St

Wed, Apr 13, 2022, 7:22 PM 4 min read

QANTM Intellectual Property (ASX:QIP) has had a rough three months with its share price down 16%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on QANTM Intellectual Property's ROE.

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.

View our latest analysis for QANTM Intellectual Property

How To 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 QANTM Intellectual Property is:

11% = AU$7.8m ÷ AU$73m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.11 in profit.

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. 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 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.

QANTM Intellectual Property's Earnings Growth And 11% ROE

To begin with, QANTM Intellectual Property seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 12%. Given the circumstances, we can't help but wonder why QANTM Intellectual Property saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared QANTM Intellectual Property's net income growth with the industry and found that the average industry growth rate was 22% in the same period.

past-earnings-growth — ASX:QIP Past Earnings Growth April 14th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is QANTM Intellectual Property fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is QANTM Intellectual Property Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 98% (implying that the company keeps only 1.6% of its income) of its business to reinvest into its business), most of QANTM Intellectual Property's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, QANTM Intellectual Property has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 66% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 17%, over the same period.

Summary

Overall, we have mixed feelings about QANTM Intellectual Property. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.