Weak Financial Prospects Seem To Be Dragging Down Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) Stock
With its stock down 12% over the past month, it is easy to disregard Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG). 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 Shangri-La Hotels (Malaysia) Berhad's ROE today.
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.
See our latest analysis for Shangri-La Hotels (Malaysia) Berhad
How Do You 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 Shangri-La Hotels (Malaysia) Berhad is:
2.2% = RM20m ÷ RM912m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.02 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Shangri-La Hotels (Malaysia) Berhad's Earnings Growth And 2.2% ROE
It is quite clear that Shangri-La Hotels (Malaysia) Berhad's ROE is rather low. Not just that, even compared to the industry average of 3.9%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 34% seen by Shangri-La Hotels (Malaysia) Berhad over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.5% in the same 5-year period, we still found Shangri-La Hotels (Malaysia) Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
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. Is Shangri-La Hotels (Malaysia) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Shangri-La Hotels (Malaysia) Berhad Making Efficient Use Of Its Profits?
Shangri-La Hotels (Malaysia) Berhad's very high three-year median payout ratio of 192% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. You can see the 2 risks we have identified for Shangri-La Hotels (Malaysia) Berhad by visiting our risks dashboard for free on our platform here.
Moreover, Shangri-La Hotels (Malaysia) Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Shangri-La Hotels (Malaysia) Berhad. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Shangri-La Hotels (Malaysia) Berhad and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
