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Are Scientex Packaging (Ayer Keroh) Berhad’s (KLSE:SCIPACK) mixed financial results the reason for its dismal stock market performance?
Scientex Packaging (Ayer Keroh) Berhad (KLSE:SCIPACK) has had a tough month with its share price falling 3.8%. It is possible that the markets have ignored the company’s mixed financials and decided to lean towards negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term and hence 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 has received from its shareholders. In other words, it is a profitability ratio that 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 using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Therefore, based on the above formula, the ROE of Scientex Packaging (Ayer Keroh) Berhad is:
4.4% = RM18 million ÷ RM411 million (based on the last 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 every MYR1 of shareholders’ equity it has, the company has made MYR0.04 in profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an efficient indicator of a company’s future earnings. Depending on how much of these earnings 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 a higher return on equity and higher earnings retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
Scientex Packaging (Ayer Keroh) Berhad Earnings Growth and ROE of 4.4%
It is hard to argue that Scientex Packaging (Ayer Keroh) Berhad’s ROE is very good in itself. Not only that, even compared to the industry average of 7.9%, the company’s ROE is completely normal. Given the circumstances, the significant decline in net profit of 2.7% seen by Scientex Packaging (Ayer Keroh) Berhad over the past five years is not surprising. However, there could also be other factors causing the decline in profits. Such as – low profit retention or poor capital allocation.
The story continues
However, when we compare Scientex Packaging (Ayer Keroh) Berhad’s growth with the industry, we find that while the company’s profits have declined, the industry has seen a 14% profit growth over the same period. This is quite worrying.
past-earnings-growth
Earnings growth is an important metric to consider when evaluating a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already factored into the stock’s price. By doing so, they will have an idea of whether the stock is headed for clear blue waters or if swampy waters await. If you are wondering about Scientex Packaging (Ayer Keroh) Berhad’s valuation, check out this indicator of your price/earnings ratiocompared to its sector.
Is Scientex Packaging (Ayer Keroh) Berhad using its retained earnings effectively?
Looking at its three-year median payout ratio of 36% (or a retention rate of 64%), which is pretty standard, Scientex Packaging (Ayer Keroh) Berhad’s declining earnings are quite disconcerting, as one would expect to see good growth when a company is retaining a good portion of its earnings. So, there could be other factors at play here that could be potentially hampering growth. For one, the business has faced some headwinds.
Furthermore, Scientex Packaging (Ayer Keroh) Berhad has been paying dividends for at least ten years or more, suggesting that management must have realized that shareholders prefer dividends to earnings growth.
Conclusion
Overall, we are somewhat ambivalent about Scientex Packaging (Ayer Keroh) Berhad’s performance. While it appears to be retaining most of its profits, given the low ROE, investors may not be benefiting from all this reinvestment after all. The low earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this company and one way to do so would be to analyze the risk profile of the business. To learn about the 3 risks we have identified for Scientex Packaging (Ayer Keroh) Berhad, visit our risk panel for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our aim is to bring you long-term focused analysis, driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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