Are Poor Financial Prospects Dragging Down Mesaieed Petrochemical Holding Company Q.P.S.C. (DSM:MPHC Stock?

With its stock down 7.9% over the past three months, it is easy to disregard Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Mesaieed Petrochemical Holding Company Q.P.S.C'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Mesaieed Petrochemical Holding Company Q.P.S.C

How Do You Calculate Return On Equity?

ROE 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 Mesaieed Petrochemical Holding Company Q.P.S.C is:

5.5% = ر.ق896m ÷ ر.ق16b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.05.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Mesaieed Petrochemical Holding Company Q.P.S.C's Earnings Growth And 5.5% ROE

It is hard to argue that Mesaieed Petrochemical Holding Company Q.P.S.C's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.5%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 3.0% seen by Mesaieed Petrochemical Holding Company Q.P.S.C was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Mesaieed Petrochemical Holding Company Q.P.S.C's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 10% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Mesaieed Petrochemical Holding Company Q.P.S.C fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mesaieed Petrochemical Holding Company Q.P.S.C Using Its Retained Earnings Effectively?

Mesaieed Petrochemical Holding Company Q.P.S.C's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 78% (or a retention ratio of 22%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 2 risks we have identified for Mesaieed Petrochemical Holding Company Q.P.S.C visit our risks dashboard for free.

Moreover, Mesaieed Petrochemical Holding Company Q.P.S.C 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.

Summary

In total, we would have a hard think before deciding on any investment action concerning Mesaieed Petrochemical Holding Company Q.P.S.C. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Mesaieed Petrochemical Holding Company Q.P.S.C and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.