Be Wary Of Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Qatar Electricity & Water Company Q.P.S.C is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = ر.ق874m ÷ (ر.ق25b - ر.ق4.7b) (Based on the trailing twelve months to March 2023).

So, Qatar Electricity & Water Company Q.P.S.C has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.1%.

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

Above you can see how the current ROCE for Qatar Electricity & Water Company Q.P.S.C compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Qatar Electricity & Water Company Q.P.S.C's ROCE Trend?

On the surface, the trend of ROCE at Qatar Electricity & Water Company Q.P.S.C doesn't inspire confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 4.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Qatar Electricity & Water Company Q.P.S.C is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 20% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 1 warning sign with Qatar Electricity & Water Company Q.P.S.C and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.