Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.041 = ر.ق595m ÷ (ر.ق18b - ر.ق3.1b) (Based on the trailing twelve months to June 2021).

Therefore, Qatar Electricity & Water Company Q.P.S.C has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

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'd like, you can check out the forecasts from the analysts covering Qatar Electricity & Water Company Q.P.S.C here for free.

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

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 4.1% from 12% five years ago. However it looks like Qatar Electricity & Water Company Q.P.S.C might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Qatar Electricity & Water Company Q.P.S.C is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Qatar Electricity & Water Company Q.P.S.C that you might find interesting.

While Qatar Electricity & Water Company Q.P.S.C may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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