Declining Stock and Decent Financials: Is The Market Wrong About Pentamaster Corporation Berhad (KLSE:PENTA)?

With its stock down 18% over the past month, it is easy to disregard Pentamaster Corporation Berhad (KLSE:PENTA). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Pentamaster Corporation Berhad's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Pentamaster Corporation Berhad

How To Calculate Return On Equity?

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 Pentamaster Corporation Berhad is:

11% = RM116m ÷ RM1.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Pentamaster Corporation Berhad's Earnings Growth And 11% ROE

On the face of it, Pentamaster Corporation 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 7.1% which we definitely can't overlook. Yet, Pentamaster Corporation Berhad has posted measly growth of 2.4% over the past five years. 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 low earnings growth.

We then compared Pentamaster Corporation Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.0% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PENTA fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Pentamaster Corporation Berhad Making Efficient Use Of Its Profits?

A low three-year median payout ratio of 17% (implying that the company retains the remaining 83% of its income) suggests that Pentamaster Corporation Berhad is retaining most of its profits. This should be reflected in its earnings growth number, but that's not the case. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Pentamaster Corporation Berhad has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 13% over the next three years. As a result, the expected drop in Pentamaster Corporation Berhad's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.

Summary

Overall, we feel that Pentamaster Corporation 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.