Mesaieed Petrochemical Holding Company Q.P.S.C.'s (DSM:MPHC) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Mesaieed Petrochemical Holding Company Q.P.S.C's (DSM:MPHC) stock is up by a considerable 5.6% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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

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

7.9% = ر.ق1.3b ÷ ر.ق17b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every QAR1 worth of shareholders' equity, the company generated QAR0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Mesaieed Petrochemical Holding Company Q.P.S.C's Earnings Growth And 7.9% ROE

As you can see, Mesaieed Petrochemical Holding Company Q.P.S.C's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 8.1%. However, the modest 5.9% net income growth seen by Mesaieed Petrochemical Holding Company Q.P.S.C over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Mesaieed Petrochemical Holding Company Q.P.S.C's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Mesaieed Petrochemical Holding Company Q.P.S.C is trading on a high P/E or a low P/E, relative to its industry.

Is Mesaieed Petrochemical Holding Company Q.P.S.C Making Efficient Use Of Its Profits?

Mesaieed Petrochemical Holding Company Q.P.S.C has a significant three-year median payout ratio of 72%, meaning that it is left with only 28% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Mesaieed Petrochemical Holding Company Q.P.S.C has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we have mixed feelings about Mesaieed Petrochemical Holding Company Q.P.S.C. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher 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. So it may be worth checking this free detailed graph of Mesaieed Petrochemical Holding Company Q.P.S.C's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.