Is MISC Berhad's (KLSE:MISC) Stock On A Downtrend As A Result Of Its Poor Financials?
MISC Berhad (KLSE:MISC) has had a rough month with its share price down 4.5%. 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 MISC Berhad's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for MISC Berhad
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for MISC Berhad is:
4.8% = RM1.8b ÷ RM38b (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of MISC Berhad's Earnings Growth And 4.8% ROE
As you can see, MISC Berhad's ROE looks pretty weak. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to MISC Berhad's very little net income growth of 2.1% over the past five years.
We then compared MISC Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 24% in the same period, which is a bit concerning.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about MISC Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is MISC Berhad Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 81% (or a retention ratio of 19%), most of MISC Berhad's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, MISC Berhad has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 59% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 6.1%, over the same period.
Conclusion
On the whole, MISC Berhad's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
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