Is Al Meera Consumer Goods Company Q.P.S.C.'s (DSM:MERS) Stock On A Downtrend As A Result Of Its Poor Financials?

With its stock down 12% over the past three months, it is easy to disregard Al Meera Consumer Goods Company Q.P.S.C (DSM:MERS). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Al Meera Consumer Goods Company Q.P.S.C's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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?

Return on equity can be calculated by using the formula:

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:

12% = ر.ق189m ÷ ر.ق1.6b (Based on the trailing twelve months to September 2022).

The 'return' is the profit 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.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Al Meera Consumer Goods Company Q.P.S.C's Earnings Growth And 12% ROE

When you first look at it, Al Meera Consumer Goods Company Q.P.S.C's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 9.5% which we definitely can't overlook. 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. So that could be one of the factors that are causing earnings growth to stay flat.

We then compared Al Meera Consumer Goods Company Q.P.S.C's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is MERS worth today? The intrinsic value infographic in our free research report helps visualize whether MERS is currently mispriced by the market.

Is Al Meera Consumer Goods Company Q.P.S.C Using Its Retained Earnings Effectively?

Al Meera Consumer Goods Company Q.P.S.C has a high three-year median payout ratio of 90% (or a retention ratio of 9.9%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

In addition, Al Meera Consumer Goods Company Q.P.S.C has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 85%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 12%.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.