Should We Be Excited About The Trends Of Returns At Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS)?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Qatar Electricity & Water Company Q.P.S.C (DSM:QEWS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. 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)

0.038 = ر.ق526m ÷ (ر.ق17b - ر.ق3.2b) (Based on the trailing twelve months to December 2020).

Therefore, Qatar Electricity & Water Company Q.P.S.C has an ROCE of 3.8%. On its own that's a low return, but compared to the average of 3.0% generated by the Integrated Utilities industry, it's much better.

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

In the above chart we have measured Qatar Electricity & Water Company Q.P.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

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 10%, but since then they've fallen to 3.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

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. Unsurprisingly, the stock has only gained 4.1% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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

While Qatar Electricity & Water Company Q.P.S.C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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