Is RedPlanet Berhad's (KLSE:RPLANET) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that RedPlanet Berhad's (KLSE:RPLANET) stock increased significantly by 16% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to RedPlanet Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for RedPlanet Berhad

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for RedPlanet Berhad is:

16% = RM3.8m ÷ RM24m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.16 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.

RedPlanet Berhad's Earnings Growth And 16% ROE

To begin with, RedPlanet Berhad seems to have a respectable ROE. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. This certainly adds some context to RedPlanet Berhad's decent 5.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that RedPlanet Berhad's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 RedPlanet Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is RedPlanet Berhad Making Efficient Use Of Its Profits?

RedPlanet Berhad has a three-year median payout ratio of 37%, which implies that it retains the remaining 63% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, RedPlanet Berhad has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with RedPlanet Berhad's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 4 risks we have identified for RedPlanet Berhad.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.