- Oil and Gas
Is Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s (DSM:QGTS) 14% ROE Strong Compared To Its Industry?
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).
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Qatar Gas Transport Company Limited (Nakilat) (QPSC)
How To 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 Gas Transport Company Limited (Nakilat) (QPSC) is:
14% = ر.ق1.5b ÷ ر.ق11b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.14 in profit.
Does Qatar Gas Transport Company Limited (Nakilat) (QPSC) Have A Good ROE?
By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. The image below shows that Qatar Gas Transport Company Limited (Nakilat) (QPSC) has an ROE that is roughly in line with the Oil and Gas industry average (14%).
So while the ROE is not exceptional, at least its acceptable. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments.
The Importance Of Debt To Return On Equity
Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
Combining Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s Debt And Its 14% Return On Equity
Qatar Gas Transport Company Limited (Nakilat) (QPSC) clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.81. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.
Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.
Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to check this FREE visualization of analyst 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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Find out whether Qatar Gas Transport Company Limited (Nakilat) (QPSC) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Qatar Gas Transport Company Limited (Nakilat) (QPSC)
Qatar Gas Transport Company Limited (Nakilat) (QPSC), together with its subsidiaries, operates as a shipping and maritime company in Qatar.
Acceptable track record with imperfect balance sheet.