Kuala Lumpur Kepong Berhad (KLSE:KLK) On An Uptrend: Could Fundamentals Be Driving The Stock?
Most readers would already know that Kuala Lumpur Kepong Berhad's (KLSE:KLK) stock increased by 2.1% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Kuala Lumpur Kepong Berhad's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Kuala Lumpur Kepong Berhad
How Do You Calculate Return On Equity?
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 Kuala Lumpur Kepong Berhad is:
6.1% = RM991m ÷ RM16b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Kuala Lumpur Kepong Berhad's Earnings Growth And 6.1% ROE
When you first look at it, Kuala Lumpur Kepong Berhad's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.8%, we may spare it some thought. Looking at Kuala Lumpur Kepong Berhad's exceptional 25% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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.
As a next step, we compared Kuala Lumpur Kepong Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 25% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Kuala Lumpur Kepong Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Kuala Lumpur Kepong Berhad Efficiently Re-investing Its Profits?
The three-year median payout ratio for Kuala Lumpur Kepong Berhad is 50%, which is moderately low. The company is retaining the remaining 50%. By the looks of it, the dividend is well covered and Kuala Lumpur Kepong Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Kuala Lumpur Kepong 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 47%. Regardless, the future ROE for Kuala Lumpur Kepong Berhad is predicted to rise to 8.9% despite there being not much change expected in its payout ratio.
Summary
In total, it does look like Kuala Lumpur Kepong Berhad has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.