Should You Be Impressed By Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s (DSM:QGTS) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Qatar Gas Transport Company Limited (Nakilat) (QPSC) (DSM:QGTS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Qatar Gas Transport Company Limited (Nakilat) (QPSC), this is the formula:

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

0.062 = ر.ق1.9b ÷ (ر.ق33b - ر.ق2.8b) (Based on the trailing twelve months to December 2020).

So, Qatar Gas Transport Company Limited (Nakilat) (QPSC) has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 7.3%.

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

In the above chart we have measured Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s ROCE Trend?

There hasn't been much to report for Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Qatar Gas Transport Company Limited (Nakilat) (QPSC) doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Qatar Gas Transport Company Limited (Nakilat) (QPSC) has been paying out a decent 45% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line On Qatar Gas Transport Company Limited (Nakilat) (QPSC)'s ROCE

In summary, Qatar Gas Transport Company Limited (Nakilat) (QPSC) isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Qatar Gas Transport Company Limited (Nakilat) (QPSC) does have some risks though, and we've spotted 1 warning sign for Qatar Gas Transport Company Limited (Nakilat) (QPSC) that you might be interested in.

While Qatar Gas Transport Company Limited (Nakilat) (QPSC) 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. 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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