Scientex Packaging (Ayer Keroh) Berhad (KLSE:SCIPACK) has had a rough month with its share price down 3.8%. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study Scientex Packaging (Ayer Keroh) Berhad’s ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Scientex Packaging (Ayer Keroh) Berhad
How Is ROE Calculated?
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 Scientex Packaging (Ayer Keroh) Berhad is:
4.4% = RM18m ÷ RM411m (Based on the trailing twelve months to April 2024).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made 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. 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.
Scientex Packaging (Ayer Keroh) Berhad’s Earnings Growth And 4.4% ROE
It is hard to argue that Scientex Packaging (Ayer Keroh) Berhad’s ROE is much good in and of itself. Not just that, even compared to the industry average of 7.9%, the company’s ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 2.7% seen by Scientex Packaging (Ayer Keroh) Berhad over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.
However, when we compared Scientex Packaging (Ayer Keroh) Berhad’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
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. If you’re wondering about Scientex Packaging (Ayer Keroh) Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Scientex Packaging (Ayer Keroh) Berhad Using Its Retained Earnings Effectively?
Looking at its three-year median payout ratio of 36% (or a retention ratio of 64%) which is pretty normal, Scientex Packaging (Ayer Keroh) Berhad’s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Scientex Packaging (Ayer Keroh) 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’re a bit ambivalent about Scientex Packaging (Ayer Keroh) Berhad’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Scientex Packaging (Ayer Keroh) Berhad visit our risks dashboard for free.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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