Are Poor Financial Prospects Dragging Down Qatar Electricity & Water Company Q.P.S.C. (DSM:QEWS Stock?

Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) has had a rough month with its share price down 3.6%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Qatar Electricity & Water Company Q.P.S.C's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Qatar Electricity & Water Company Q.P.S.C

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 Electricity & Water Company Q.P.S.C is:

12% = ر.ق1.7b ÷ ر.ق14b (Based on the trailing twelve months to March 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Qatar Electricity & Water Company Q.P.S.C's Earnings Growth And 12% ROE

When you first look at it, Qatar Electricity & Water Company Q.P.S.C's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 10%, so we won't completely dismiss the company. Having said that, Qatar Electricity & Water Company Q.P.S.C's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that Qatar Electricity & Water Company Q.P.S.C's reported growth was lower than the industry growth of 4.3% in the same period, which is not something we like to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for QEWS? You can find out in our latest intrinsic value infographic research report.

Is Qatar Electricity & Water Company Q.P.S.C Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 59% (implying that the company keeps only 41% of its income) of its business to reinvest into its business), most of Qatar Electricity & Water Company Q.P.S.C's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Qatar Electricity & Water 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 65%. Accordingly, forecasts suggest that Qatar Electricity & Water Company Q.P.S.C's future ROE will be 11% which is again, similar to the current ROE.

Summary

On the whole, Qatar Electricity & Water Company Q.P.S.C's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.