Is Qatar Fuel Company Q.P.S.C. ("WOQOD")'s (DSM:QFLS) Recent Performance Underpinned By Weak Financials?

Qatar Fuel Company Q.P.S.C. (WOQOD) (DSM:QFLS) has had a rough month with its share price down 5.8%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Qatar Fuel Company Q.P.S.C. (WOQOD)'s ROE today.

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 Qatar Fuel Company Q.P.S.C. (WOQOD)

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

11% = ر.ق1.0b ÷ ر.ق9.4b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.11.

What Has ROE Got To Do With 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 Qatar Fuel Company Q.P.S.C. (WOQOD)'s Earnings Growth And 11% ROE

As you can see, Qatar Fuel Company Q.P.S.C. (WOQOD)'s ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 12% either. Therefore, it might not be wrong to say that the five year net income decline of 2.9% seen by Qatar Fuel Company Q.P.S.C. (WOQOD) was possibly a result of the disappointing ROE.

That being said, we compared Qatar Fuel Company Q.P.S.C. (WOQOD)'s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 21% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Qatar Fuel Company Q.P.S.C. (WOQOD) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qatar Fuel Company Q.P.S.C. (WOQOD) Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 78% (implying that 22% of the profits are retained), most of Qatar Fuel Company Q.P.S.C. (WOQOD)'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 2 risks we have identified for Qatar Fuel Company Q.P.S.C. (WOQOD) by visiting our risks dashboard for free on our platform here.

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 92%. 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.

Conclusion

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. To gain further insights into Qatar Fuel Company Q.P.S.C. (WOQOD)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.