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 1.1% over the past week. It seems that the market might have completely ignored the positive aspects of the company’s fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Specifically, we decided to study Qatar Electricity & Water Company Q.P.S.C’s ROE in this article.

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 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:

11% = ر.ق1.7b ÷ ر.ق15b (Based on the trailing twelve months to September 2024).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each QAR1 of shareholders’ capital it has, the company made QAR0.11 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Qatar Electricity & Water Company Q.P.S.C’s Earnings Growth And 11% ROE

As you can see, Qatar Electricity & Water Company Q.P.S.C’s ROE looks pretty weak. However, the fact that it is higher than the industry average of 7.9% makes us a bit more interested. Having said that, Qatar Electricity & Water Company Q.P.S.C’s net income growth of 4.3% over the past five years is a bit low. Remember, the company’s ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

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 19% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for QEWS? You can find out in our latest intrinsic value infographic research report.

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

Qatar Electricity & Water Company Q.P.S.C has a three-year median payout ratio of 61% (implying that it keeps only 39% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

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 60%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 10%.

Summary

On the whole, we feel that the performance shown by Qatar Electricity & Water Company Q.P.S.C can be open to many interpretations. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.