PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
With its stock down 5.2% over the past three months, it is easy to disregard PETRONAS Chemicals Group Berhad (KLSE:PCHEM). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on PETRONAS Chemicals Group Berhad's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for PETRONAS Chemicals Group Berhad
How To 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 PETRONAS Chemicals Group Berhad is:
4.2% = RM1.8b ÷ RM42b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.04 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
PETRONAS Chemicals Group Berhad's Earnings Growth And 4.2% ROE
It is hard to argue that PETRONAS Chemicals Group Berhad's ROE is much good in and of itself. Even compared to the average industry ROE of 5.3%, the company's ROE is quite dismal. Although, we can see that PETRONAS Chemicals Group Berhad saw a modest net income growth of 7.3% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. 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.
Next, on comparing PETRONAS Chemicals Group Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.7% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about PETRONAS Chemicals Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is PETRONAS Chemicals Group Berhad Efficiently Re-investing Its Profits?
While PETRONAS Chemicals Group Berhad has a three-year median payout ratio of 52% (which means it retains 48% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.
Besides, PETRONAS Chemicals Group Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 60% of its profits over the next three years. Still, forecasts suggest that PETRONAS Chemicals Group Berhad's future ROE will rise to 7.2% even though the the company's payout ratio is not expected to change by much.
Conclusion
On the whole, we do feel that PETRONAS Chemicals Group Berhad has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
