Vodafone Qatar P.Q.S.C’s (DSM:VFQS) stock is up by 5.4% over the past three months. However, the company’s financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. In this article, we decided to focus on Vodafone Qatar P.Q.S.C’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How To Calculate Return On Equity?
ROE 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 Vodafone Qatar P.Q.S.C is:
7.1% = ر.ق327m ÷ ر.ق4.6b (Based on the trailing twelve months to December 2021).
The ‘return’ is the profit 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 QAR0.07 in profit.
Why Is ROE Important For 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.
Vodafone Qatar P.Q.S.C’s Earnings Growth And 7.1% ROE
As you can see, Vodafone Qatar P.Q.S.C’s ROE looks pretty weak. Even compared to the average industry ROE of 13%, the company’s ROE is quite dismal. Despite this, surprisingly, Vodafone Qatar P.Q.S.C saw an exceptional 65% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared Vodafone Qatar P.Q.S.C’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 7.8% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Vodafone Qatar P.Q.S.C’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Vodafone Qatar P.Q.S.C Efficiently Re-investing Its Profits?
Vodafone Qatar P.Q.S.C’s very high three-year median payout ratio of 144% suggests that the company is paying more to its shareholders than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on.
Besides, Vodafone Qatar P.Q.S.C has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 94% over the next three years. As a result, the expected drop in Vodafone Qatar P.Q.S.C’s payout ratio explains the anticipated rise in the company’s future ROE to 8.7%, over the same period.
Overall, we have mixed feelings about Vodafone Qatar P.Q.S.C. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.