Qatar Cinema and Film Distribution Co. (Q.P.S.C)'s (DSM:QCFS) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Most readers would already be aware that Qatar Cinema and Film Distribution (Q.P.S.C)'s (DSM:QCFS) stock increased significantly by 12% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Qatar Cinema and Film Distribution (Q.P.S.C)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

We've discovered 3 warning signs about Qatar Cinema and Film Distribution (Q.P.S.C). View them for free.

How To 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 Qatar Cinema and Film Distribution (Q.P.S.C) is:

3.2% = ر.ق4.2m ÷ ر.ق132m (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.03.

View our latest analysis for Qatar Cinema and Film Distribution (Q.P.S.C)

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Qatar Cinema and Film Distribution (Q.P.S.C)'s Earnings Growth And 3.2% ROE

As you can see, Qatar Cinema and Film Distribution (Q.P.S.C)'s ROE looks pretty weak. Even when compared to the industry average of 7.2%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 3.7% seen by Qatar Cinema and Film Distribution (Q.P.S.C) over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Qatar Cinema and Film Distribution (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 12% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Qatar Cinema and Film Distribution (Q.P.S.C) is trading on a high P/E or a low P/E, relative to its industry.

Is Qatar Cinema and Film Distribution (Q.P.S.C) Using Its Retained Earnings Effectively?

With a three-year median payout ratio as high as 105%,Qatar Cinema and Film Distribution (Q.P.S.C)'s shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend beyond their means is usually not viable over the long term. You can see the 3 risks we have identified for Qatar Cinema and Film Distribution (Q.P.S.C) by visiting our risks dashboard for free on our platform here.

In addition, Qatar Cinema and Film Distribution (Q.P.S.C) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Qatar Cinema and Film Distribution (Q.P.S.C). Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. 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 Qatar Cinema and Film Distribution (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.