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

With its stock down 2.6% over the past month, it is easy to disregard Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Qatar Electricity & Water Company Q.P.S.C's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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

12% = ر.ق1.8b ÷ ر.ق15b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each QAR1 of shareholders' capital it has, the company made QAR0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Qatar Electricity & Water Company Q.P.S.C's Earnings Growth And 12% ROE

At first glance, Qatar Electricity & Water Company Q.P.S.C's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 11%. Having said that, Qatar Electricity & Water Company Q.P.S.C has shown a meagre net income growth of 2.1% over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

As a next step, we compared Qatar Electricity & Water Company Q.P.S.C's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is QEWS worth today? The intrinsic value infographic in our free research report helps visualize whether QEWS is currently mispriced by the market.

Is Qatar Electricity & Water Company Q.P.S.C Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 59% (or a retention ratio of 41%), most of Qatar Electricity & Water Company Q.P.S.C's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 66%. As a result, Qatar Electricity & Water Company Q.P.S.C's ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning Qatar Electricity & Water Company Q.P.S.C. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.