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

With its stock down 6.4% over the past three months, it is easy to disregard Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS). 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. Specifically, we decided to study Qatar Electricity & Water Company Q.P.S.C's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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:

10% = ر.ق1.5b ÷ ر.ق15b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every QAR1 of its shareholder's investments, the company generates a profit of QAR0.10.

Why Is ROE Important For 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 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 Electricity & Water Company Q.P.S.C's Earnings Growth And 10% ROE

As you can see, Qatar Electricity & Water Company Q.P.S.C's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 9.8% either. Accordingly, Qatar Electricity & Water Company Q.P.S.C's low net income growth of 4.0% over the past five years can possibly be explained by the low ROE amongst other factors.

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 19% over the last few years, 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. 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 Making Efficient Use Of Its Profits?

Qatar Electricity & Water Company Q.P.S.C has a three-year median payout ratio of 60% (implying that it keeps only 40% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Additionally, Qatar Electricity & Water Company Q.P.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. 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 9.6% 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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