Qatari Investors Group Q.S.C.'s (DSM:QIGD) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Most readers would already be aware that Qatari Investors Group Q.S.C's (DSM:QIGD) stock increased significantly by 10% over the past month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Qatari Investors Group Q.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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Qatari Investors Group Q.S.C

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Qatari Investors Group Q.S.C is:

3.1% = ر.ق90m ÷ ر.ق2.9b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.03.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Qatari Investors Group Q.S.C's Earnings Growth And 3.1% ROE

It is hard to argue that Qatari Investors Group Q.S.C's ROE is much good in and of itself. Not just that, even compared to the industry average of 8.6%, the company's ROE is entirely unremarkable. For this reason, Qatari Investors Group Q.S.C's five year net income decline of 20% is not surprising given its 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 Qatari Investors Group Q.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 7.9% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Qatari Investors Group Q.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qatari Investors Group Q.S.C Efficiently Re-investing Its Profits?

Qatari Investors Group Q.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 50% (or a retention ratio of 50%). 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. Our risks dashboard should have the 4 risks we have identified for Qatari Investors Group Q.S.C.

Additionally, Qatari Investors Group Q.S.C has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Qatari Investors Group Q.S.C. 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. Up till now, we've only made a short study of the company's growth data. To gain further insights into Qatari Investors Group Q.S.C's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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