Qatar Fuel Company Q.P.S.C.("WOQOD")'s (DSM:QFLS) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Qatar Fuel Company Q.P.S.C.(WOQOD)'s (DSM:QFLS) stock is up by a considerable 8.4% over the past month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Qatar Fuel Company Q.P.S.C.(WOQOD)'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View 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:

9.7% = ر.ق799m ÷ ر.ق8.2b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.10.

Why Is ROE Important For 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.

Qatar Fuel Company Q.P.S.C.(WOQOD)'s Earnings Growth And 9.7% 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 8.5%. 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.

We then compared Qatar Fuel Company Q.P.S.C.(WOQOD)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same period, which is a bit concerning.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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) Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 71% (meaning, the company retains only 29% 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 is expected to rise to 89% over the next three years.

Summary

Overall, we would be extremely cautious before making any decision on Qatar Fuel Company Q.P.S.C.(WOQOD). 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. 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.
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