George Kent (Malaysia) Berhad's (KLSE:GKENT) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that George Kent (Malaysia) Berhad's (KLSE:GKENT) stock increased significantly by 39% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study George Kent (Malaysia) 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.

See our latest analysis for George Kent (Malaysia) Berhad

How Do You Calculate Return On Equity?

Return on equity 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 George Kent (Malaysia) Berhad is:

5.9% = RM29m ÷ RM503m (Based on the trailing twelve months to July 2020).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.06.

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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of George Kent (Malaysia) Berhad's Earnings Growth And 5.9% ROE

It is hard to argue that George Kent (Malaysia) Berhad's ROE is much good in and of itself. However, the fact that it is higher than the industry average of 4.7% makes us a bit more interested. However, George Kent (Malaysia) Berhad has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the disappointing earnings growth.

We then compared George Kent (Malaysia) Berhad's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 4.0% in the same period. This does appease the negative sentiment around the company to a certain extent.

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 George Kent (Malaysia) Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is George Kent (Malaysia) Berhad Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 42% (meaning the company retains58% of profits) in the last three-year period, George Kent (Malaysia) Berhad's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, George Kent (Malaysia) 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 34%. However, George Kent (Malaysia) Berhad's ROE is predicted to rise to 7.7% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that George Kent (Malaysia) Berhad certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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