Qatar Industrial Manufacturing Company Q.P.S.C's (DSM:QIMD) stock is up by 2.1% over the past week. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Qatar Industrial Manufacturing Company 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
The formula for ROE 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:
5.4% = ر.ق89m ÷ ر.ق1.6b (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.05.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Qatar Industrial Manufacturing Company Q.P.S.C's Earnings Growth And 5.4% ROE
It is hard to argue that Qatar Industrial Manufacturing Company Q.P.S.C's ROE is much good in and of itself. Even when compared to the industry average of 8.5%, the ROE figure is pretty disappointing. For this reason, Qatar Industrial Manufacturing Company Q.P.S.C's five year net income decline of 15% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
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 1.3% in the same period. This is quite worrisome.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 67% (implying that 33% of the profits are retained), most of Qatar Industrial Manufacturing Company Q.P.S.C's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 4 risks we have identified for Qatar Industrial Manufacturing Company Q.P.S.C by visiting our risks dashboard for free on our platform here.
Additionally, Qatar Industrial Manufacturing Company Q.P.S.C has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Overall, we would be extremely cautious before making any decision on Qatar Industrial Manufacturing Company Q.P.S.C. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. 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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