Is Mesaieed Petrochemical Holding Company Q.P.S.C.'s (DSM:MPHC) Stock On A Downtrend As A Result Of Its Poor Financials?

Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC) has had a rough three months with its share price down 6.9%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Mesaieed Petrochemical Holding Company Q.P.S.C's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

How To 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 Mesaieed Petrochemical Holding Company Q.P.S.C is:

4.9% = ر.ق801m ÷ ر.ق16b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 4.9% 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 7.0% seen by Mesaieed Petrochemical Holding Company Q.P.S.C was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Mesaieed Petrochemical Holding Company Q.P.S.C's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Mesaieed Petrochemical Holding Company Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

With a high three-year median payout ratio of 87% (implying that 13% of the profits are retained), most of Mesaieed Petrochemical Holding Company Q.P.S.C's profits are being paid to shareholders, which explains the company's shrinking earnings. 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.

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

On the whole, Mesaieed Petrochemical Holding Company Q.P.S.C's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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.