Declining Stock and Decent Financials: Is The Market Wrong About PETRONAS Dagangan Berhad (KLSE:PETDAG)?

PETRONAS Dagangan Berhad (KLSE:PETDAG) has had a rough month with its share price down 5.4%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on PETRONAS Dagangan 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for PETRONAS Dagangan 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 PETRONAS Dagangan Berhad is:

17% = RM967m ÷ RM5.8b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.17 in profit.

What Is The Relationship Between ROE And 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.

PETRONAS Dagangan Berhad's Earnings Growth And 17% ROE

To begin with, PETRONAS Dagangan Berhad seems to have a respectable ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This probably laid the ground for PETRONAS Dagangan Berhad's moderate 5.4% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that PETRONAS Dagangan Berhad's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about PETRONAS Dagangan Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is PETRONAS Dagangan Berhad Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 90% (or a retention ratio of 10%) for PETRONAS Dagangan Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, PETRONAS Dagangan Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 101% of its profits over the next three years. Accordingly, forecasts suggest that PETRONAS Dagangan Berhad's future ROE will be 17% which is again, similar to the current ROE.

Conclusion

In total, it does look like PETRONAS Dagangan Berhad has some positive aspects to its business. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.