Is Kelington Group Berhad's (KLSE:KGB) Latest Stock Performance A Reflection Of Its Financial Health?

Kelington Group Berhad's (KLSE:KGB) stock is up by a considerable 13% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Kelington Group Berhad's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Kelington Group Berhad

How Is ROE Calculated?

The formula for return on equity is:

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

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

30% = RM122m ÷ RM404m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.30 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 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.

Kelington Group Berhad's Earnings Growth And 30% ROE

Firstly, we acknowledge that Kelington Group Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. So, the substantial 41% net income growth seen by Kelington Group Berhad over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Kelington Group Berhad's growth is quite high when compared to the industry average growth of 8.1% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kelington Group Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Kelington Group Berhad Efficiently Re-investing Its Profits?

Kelington Group Berhad's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Kelington Group Berhad is reinvesting its earnings efficiently.

Besides, Kelington Group Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 32%. Accordingly, forecasts suggest that Kelington Group Berhad's future ROE will be 28% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Kelington Group Berhad's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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. 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.