Does Qatar Fuel Company Q.P.S.C. ("WOQOD")'s (DSM:QFLS) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?

Qatar Fuel Company Q.P.S.C. (WOQOD)'s (DSM:QFLS) stock is up by 2.8% 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. Particularly, we will be paying attention to Qatar Fuel Company Q.P.S.C. (WOQOD)'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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

How Is ROE Calculated?

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.ق8.8b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.12.

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Qatar Fuel Company Q.P.S.C. (WOQOD)'s Earnings Growth And 12% ROE

It is hard to argue that Qatar Fuel Company Q.P.S.C. (WOQOD)'s ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 11%. Qatar Fuel Company Q.P.S.C. (WOQOD)'s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Qatar Fuel Company Q.P.S.C. (WOQOD)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 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) Making Efficient Use Of Its Profits?

Qatar Fuel Company Q.P.S.C. (WOQOD) has a high three-year median payout ratio of 88% (or a retention ratio of 12%), 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.

Additionally, Qatar Fuel Company Q.P.S.C. (WOQOD) 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 90%. 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 12% for future ROE.

Summary

On the whole, Qatar Fuel Company Q.P.S.C. (WOQOD)'s performance is quite a big let-down. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.