Does Al Meera Consumer Goods Company Q.P.S.C.'s (DSM:MERS) Weak Fundamentals Mean A Downturn In Its Stock Should Be Expected?

Most readers would already know that Al Meera Consumer Goods Company Q.P.S.C's (DSM:MERS) stock increased by 6.6% over the past three months. 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. Specifically, we decided to study Al Meera Consumer Goods Company Q.P.S.C's ROE in this article.

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 Al Meera Consumer Goods Company Q.P.S.C

How To 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 Al Meera Consumer Goods Company Q.P.S.C is:

13% = ر.ق204m ÷ ر.ق1.5b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

A Side By Side comparison of Al Meera Consumer Goods Company Q.P.S.C's Earnings Growth And 13% ROE

At first glance, Al Meera Consumer Goods Company Q.P.S.C's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 8.8% doesn't go unnoticed by us. However, Al Meera Consumer Goods Company Q.P.S.C has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that Al Meera Consumer Goods Company Q.P.S.C's reported growth was lower than the industry growth of 6.3% in the same period, which is not something we like 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Al Meera Consumer Goods Company Q.P.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is Al Meera Consumer Goods Company Q.P.S.C Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 91% (meaning, the company retains only 8.9% of profits) for Al Meera Consumer Goods Company Q.P.S.C suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Al Meera Consumer Goods 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 91%. As a result, Al Meera Consumer Goods Company Q.P.S.C's ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Conclusion

Overall, we would be extremely cautious before making any decision on Al Meera Consumer Goods Company Q.P.S.C. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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