Could Qatar Fuel Company Q.P.S.C. ("WOQOD")'s (DSM:QFLS) Weak Financials Mean That The Market Could Correct Its Share Price?

Most readers would already know that Qatar Fuel Company Q.P.S.C. (WOQOD)'s (DSM:QFLS) stock increased by 3.0% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. In this article, we decided to focus on Qatar Fuel Company Q.P.S.C. (WOQOD)'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Qatar Fuel Company Q.P.S.C. (WOQOD)

How Do You 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 Fuel Company Q.P.S.C. (WOQOD) is:

12% = ر.ق1.1b ÷ ر.ق8.9b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every QAR1 worth of equity, the company was able to earn QAR0.12 in profit.

Why Is ROE Important For 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. 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 Fuel Company Q.P.S.C. (WOQOD)'s Earnings Growth And 12% ROE

It is quite clear that Qatar Fuel Company Q.P.S.C. (WOQOD)'s ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 12%. Thus, the low ROE provides some context to Qatar Fuel Company Q.P.S.C. (WOQOD)'s flat net income growth over the past five years.

As a next step, we compared Qatar Fuel Company Q.P.S.C. (WOQOD)'s net income growth with the industry and discovered that the industry saw an average growth of 21% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Qatar Fuel Company Q.P.S.C. (WOQOD) is trading on a high P/E or a low P/E, relative to its industry.

Is Qatar Fuel Company Q.P.S.C. (WOQOD) Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 87% (meaning, the company retains only 13% of profits) for Qatar Fuel Company Q.P.S.C. (WOQOD) suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Qatar Fuel Company Q.P.S.C. (WOQOD) 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 94%. As a result, Qatar Fuel Company Q.P.S.C. (WOQOD)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning Qatar Fuel Company Q.P.S.C. (WOQOD). 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Qatar Fuel Company Q.P.S.C. (WOQOD)'s past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.