Capital Allocation Trends At Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Qatar Electricity & Water Company Q.P.S.C, this is the formula:

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

0.039 = ر.ق873m ÷ (ر.ق28b - ر.ق5.2b) (Based on the trailing twelve months to December 2022).

So, Qatar Electricity & Water Company Q.P.S.C has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.1%.

See 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.

How Are Returns Trending?

In terms of Qatar Electricity & Water Company Q.P.S.C's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% from 7.4% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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

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 9.7% 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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.