Gulf Warehousing Company Q.P.S.C. (DSM:GWCS) On An Uptrend: Could Fundamentals Be Driving The Stock?

Most readers would already know that Gulf Warehousing Company Q.P.S.C's (DSM:GWCS) stock increased by 4.2% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Gulf Warehousing Company Q.P.S.C's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Gulf Warehousing Company Q.P.S.C

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Gulf Warehousing Company Q.P.S.C is:

12% = ر.ق236m ÷ ر.ق1.9b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every QAR1 worth of equity, the company was able to earn QAR0.12 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Gulf Warehousing Company Q.P.S.C's Earnings Growth And 12% ROE

On the face of it, Gulf Warehousing Company Q.P.S.C's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 9.3% doesn't go unnoticed by us. This certainly adds some context to Gulf Warehousing Company Q.P.S.C's moderate 5.1% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Gulf Warehousing Company Q.P.S.C's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.7% in the same period, which is a bit concerning.

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. If you're wondering about Gulf Warehousing Company Q.P.S.C's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gulf Warehousing Company Q.P.S.C Using Its Retained Earnings Effectively?

Gulf Warehousing Company Q.P.S.C has a healthy combination of a moderate three-year median payout ratio of 47% (or a retention ratio of 53%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Gulf Warehousing Company Q.P.S.C has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Gulf Warehousing Company Q.P.S.C has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Gulf Warehousing Company Q.P.S.C by visiting our risks dashboard for free on our platform here.

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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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