Qatar Electricity & Water Company Q.P.S.C.'s (DSM:QEWS) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) has had a great run on the share market with its stock up by a significant 7.0% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Qatar Electricity & Water Company Q.P.S.C's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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

How Do You Calculate Return On Equity?

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.ق1.4b ÷ ر.ق14b (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every QAR1 worth of shareholders' equity, the company generated 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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

It is quite clear that Qatar Electricity & Water Company Q.P.S.C's ROE is rather low. However, the fact that it is higher than the industry average of 8.3% makes us a bit more interested. Or may be not, given Qatar Electricity & Water Company Q.P.S.C's five year net income decline of 4.0% in the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Qatar Electricity & Water Company Q.P.S.C's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 0.6% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 60% (or a retention ratio of 40%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Moreover, Qatar Electricity & Water Company Q.P.S.C has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over 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 69%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 12%.

Conclusion

Overall, we have mixed feelings about Qatar Electricity & Water Company Q.P.S.C. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.

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

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.