Is Qatar Gas Transport Company Limited (Nakilat) (QPSC) (DSM:QGTS) A High Quality Stock To Own?

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Qatar Gas Transport Company Limited (Nakilat) (QPSC) (DSM:QGTS).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Qatar Gas Transport Company Limited (Nakilat) (QPSC)

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Qatar Gas Transport Company Limited (Nakilat) (QPSC) is:

18% = ر.ق1.2b ÷ ر.ق6.6b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every QAR1 worth of equity, the company was able to earn QAR0.18 in profit.

Does Qatar Gas Transport Company Limited (Nakilat) (QPSC) Have A Good Return On Equity?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As you can see in the graphic below, Qatar Gas Transport Company Limited (Nakilat) (QPSC) has a higher ROE than the average (8.5%) in the Oil and Gas industry.

That's what we like to see. Bear in mind, a high ROE doesn't always mean superior financial performance. A higher proportion of debt in a company's capital structure may also result in a high ROE, where the high debt levels could be a huge risk .

Why You Should Consider Debt When Looking At ROE

Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Combining Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s Debt And Its 18% Return On Equity

It appears that Qatar Gas Transport Company Limited (Nakilat) (QPSC) makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 3.62. Most investors would need a low share price to be interested in a company with low ROE and high debt to equity.

Summary

Return on equity is one way we can compare its business quality of different companies. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Qatar Gas Transport Company Limited (Nakilat) (QPSC) may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

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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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