Does Eversafe Rubber Berhad's (KLSE:ESAFE) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Eversafe Rubber Berhad's (KLSE:ESAFE) stock is up by a considerable 30% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Eversafe Rubber 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Eversafe Rubber 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 Eversafe Rubber Berhad is:

6.9% = RM4.6m ÷ RM66m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax 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 MYR0.07 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Eversafe Rubber Berhad's Earnings Growth And 6.9% ROE

On the face of it, Eversafe Rubber Berhad's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.3% which we definitely can't overlook. But then again, seeing that Eversafe Rubber Berhad's net income shrunk at a rate of 16% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 10.0% in the same period, we still found Eversafe Rubber Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Eversafe Rubber Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Eversafe Rubber Berhad Efficiently Re-investing Its Profits?

Eversafe Rubber Berhad's high three-year median payout ratio of 357% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. To know the 5 risks we have identified for Eversafe Rubber Berhad visit our risks dashboard for free.

Moreover, Eversafe Rubber Berhad has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

Overall, we would be extremely cautious before making any decision on Eversafe Rubber Berhad. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Eversafe Rubber Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. 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.
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