Industries Qatar Q.P.S.C.'s (DSM:IQCD) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Industries Qatar Q.P.S.C (DSM:IQCD) has had a rough three months with its share price down 7.2%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Industries Qatar Q.P.S.C'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Industries Qatar Q.P.S.C

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 Industries Qatar Q.P.S.C is:

12% = ر.ق4.7b ÷ ر.ق40b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.12.

What Is The Relationship Between ROE And 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.

Industries Qatar Q.P.S.C's Earnings Growth And 12% ROE

It is hard to argue that Industries Qatar Q.P.S.C's ROE is much good in and of itself. However, the fact that it is higher than the industry average of 8.4% makes us a bit more interested. Particularly, the modest 19% net income growth seen by Industries Qatar Q.P.S.C over the past five years is a positive. That being said, the company does have a low ROE to begin with, just that its higher than the industry average. So there might well be other reasons for the earnings to grow. For instance, the company has a low payout ratio or is being managed efficiently

Next, on comparing with the industry net income growth, we found that Industries Qatar Q.P.S.C's growth is quite high when compared to the industry average growth of 13% 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 IQCD? You can find out in our latest intrinsic value infographic research report.

Is Industries Qatar Q.P.S.C Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Industries Qatar Q.P.S.C suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Industries Qatar Q.P.S.C 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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 96% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

In total, it does look like Industries Qatar Q.P.S.C has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.