Stock Analysis

Are Strong Financial Prospects The Force That Is Driving The Momentum In Kerjaya Prospek Group Berhad's KLSE:KERJAYA) Stock?

KLSE:KERJAYA
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Kerjaya Prospek Group Berhad (KLSE:KERJAYA) has had a great run on the share market with its stock up by a significant 14% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Kerjaya Prospek Group Berhad's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kerjaya Prospek Group Berhad

How Is ROE Calculated?

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 Kerjaya Prospek Group Berhad is:

9.0% = RM99m ÷ RM1.1b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Kerjaya Prospek Group Berhad's Earnings Growth And 9.0% ROE

When you first look at it, Kerjaya Prospek Group Berhad's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 4.7%, is definitely interesting. This probably goes some way in explaining Kerjaya Prospek Group Berhad's moderate 19% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

When you consider the fact that the industry earnings have shrunk at a rate of 7.6% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
KLSE:KERJAYA Past Earnings Growth February 17th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Kerjaya Prospek Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kerjaya Prospek Group Berhad Efficiently Re-investing Its Profits?

Kerjaya Prospek Group Berhad has a three-year median payout ratio of 31%, which implies that it retains the remaining 69% 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, Kerjaya Prospek Group Berhad has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 32% of its profits over the next three years. Regardless, the future ROE for Kerjaya Prospek Group Berhad is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Kerjaya Prospek Group Berhad's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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