Qatar Electricity & Water Company Q.P.S.C. (DSM:QEWS) Stock's On A Decline: Are Poor Fundamentals The Cause?

It is hard to get excited after looking at Qatar Electricity & Water Company Q.P.S.C's (DSM:QEWS) recent performance, when its stock has declined 1.4% over the past month. 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. Particularly, we will be paying attention to Qatar Electricity & Water Company Q.P.S.C's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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:

9.8% = ر.ق1.5b ÷ ر.ق15b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every QAR1 worth of equity, the company was able to earn QAR0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 9.8% ROE

It is hard to argue that Qatar Electricity & Water Company Q.P.S.C's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 9.0%. Therefore, the low net income growth of 4.1% seen by Qatar Electricity & Water Company Q.P.S.C over the past five years could probably be the result of it having a lower ROE.

We then compared Qatar Electricity & Water Company Q.P.S.C's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 17% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is QEWS fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Qatar Electricity & Water Company Q.P.S.C Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 61% (or a retention ratio of 39%), 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.

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. 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 64%. 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 9.7% for future ROE.

Conclusion

Overall, we would be extremely cautious before making any decision on 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.