Qatar Fuel Company Q.P.S.C.(WOQOD) (DSM:QFLS) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Qatar Fuel Company Q.P.S.C.(WOQOD) (DSM:QFLS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Qatar Fuel Company Q.P.S.C.(WOQOD):

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.074 = ر.ق680m ÷ (ر.ق14b - ر.ق5.3b) (Based on the trailing twelve months to June 2022).

Therefore, Qatar Fuel Company Q.P.S.C.(WOQOD) has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.

Our analysis indicates that QFLS is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qatar Fuel Company Q.P.S.C.(WOQOD)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Qatar Fuel Company Q.P.S.C.(WOQOD), check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Qatar Fuel Company Q.P.S.C.(WOQOD), we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 7.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Qatar Fuel Company Q.P.S.C.(WOQOD) is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 141% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Qatar Fuel Company Q.P.S.C.(WOQOD) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Qatar Fuel Company Q.P.S.C.(WOQOD) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.