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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 15% over the past three months, it is easy to disregard QUALCOMM (NASDAQ:QCOM). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study QUALCOMM's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for QUALCOMM

How Do You Calculate Return On Equity?

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 QUALCOMM is:

72% = US$13b ÷ US$18b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.72 in profit.

What Has ROE Got To Do With 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.

QUALCOMM's Earnings Growth And 72% ROE

Firstly, we acknowledge that QUALCOMM has a significantly high ROE. 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.

We then compared QUALCOMM's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 27% in the same period.

past-earnings-growth
past-earnings-growth

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is QCOM worth today? The intrinsic value infographic in our free research report helps visualize whether QCOM is currently mispriced by the market.

Is QUALCOMM Using Its Retained Earnings Effectively?

QUALCOMM's three-year median payout ratio is a pretty moderate 37%, meaning the company retains 63% of its income. By the looks of it, the dividend is well covered and QUALCOMM is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, QUALCOMM is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 29% over the next three years. However, QUALCOMM's future ROE is expected to decline to 37% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

In total, we are pretty happy with QUALCOMM's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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