Should Weakness in Pentamaster Corporation Berhad's (KLSE:PENTA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 27% over the past three months, it is easy to disregard Pentamaster Corporation Berhad (KLSE:PENTA). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Pentamaster Corporation 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Pentamaster Corporation Berhad

How Do You Calculate Return On Equity?

ROE 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 Pentamaster Corporation Berhad is:

13% = RM132m ÷ RM1.0b (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 MYR0.13 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Pentamaster Corporation Berhad's Earnings Growth And 13% ROE

To begin with, Pentamaster Corporation Berhad seems to have a respectable ROE. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. Yet, Pentamaster Corporation Berhad has posted measly growth of 3.2% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Pentamaster Corporation Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.6% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is PENTA worth today? The intrinsic value infographic in our free research report helps visualize whether PENTA is currently mispriced by the market.

Is Pentamaster Corporation Berhad Making Efficient Use Of Its Profits?

Pentamaster Corporation Berhad's low three-year median payout ratio of 17% (or a retention ratio of 83%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Pentamaster Corporation Berhad has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 13% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

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 high rate of return and is reinvesting ma 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.