Stock Analysis

Are Poor Financial Prospects Dragging Down Qatar Industrial Manufacturing Company Q.P.S.C. (DSM:QIMD Stock?

DSM:QIMD
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It is hard to get excited after looking at Qatar Industrial Manufacturing Company Q.P.S.C's (DSM:QIMD) recent performance, when its stock has declined 6.4% over the past month. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Qatar Industrial Manufacturing Company Q.P.S.C's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Qatar Industrial Manufacturing Company 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 Qatar Industrial Manufacturing Company Q.P.S.C is:

4.5% = ر.ق73m ÷ ر.ق1.6b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every QAR1 worth of shareholders' equity, the company generated QAR0.04 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. 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. 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.

Qatar Industrial Manufacturing Company Q.P.S.C's Earnings Growth And 4.5% ROE

As you can see, Qatar Industrial Manufacturing Company Q.P.S.C's ROE looks pretty weak. Not just that, even compared to the industry average of 7.0%, the company's ROE is entirely unremarkable. For this reason, Qatar Industrial Manufacturing Company Q.P.S.C's five year net income decline of 9.3% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared Qatar Industrial Manufacturing Company Q.P.S.C's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.9% in the same period. This is quite worrisome.

past-earnings-growth
DSM:QIMD Past Earnings Growth February 9th 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Qatar Industrial Manufacturing Company Q.P.S.C fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qatar Industrial Manufacturing Company Q.P.S.C Using Its Retained Earnings Effectively?

Qatar Industrial Manufacturing Company Q.P.S.C's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 71% (or a retention ratio of 29%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 4 risks we have identified for Qatar Industrial Manufacturing Company Q.P.S.C visit our risks dashboard for free.

Moreover, Qatar Industrial Manufacturing Company Q.P.S.C has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, Qatar Industrial Manufacturing Company Q.P.S.C's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Qatar Industrial Manufacturing Company Q.P.S.C's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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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