P.I.E. Industrial Berhad's (KLSE:PIE) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

P.I.E. Industrial Berhad (KLSE:PIE) has had a great run on the share market with its stock up by a significant 47% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on P.I.E. Industrial Berhad's ROE.

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.

Check out our latest analysis for P.I.E. Industrial 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 P.I.E. Industrial Berhad is:

4.9% = RM22m ÷ RM442m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.05 in profit.

What Is The Relationship Between ROE And 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.

P.I.E. Industrial Berhad's Earnings Growth And 4.9% ROE

It is hard to argue that P.I.E. Industrial Berhad's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 5.4% either. Given the low ROE P.I.E. Industrial Berhad's five year net income decline of 9.3% is not surprising.

Next, on comparing with the industry net income growth, we found that P.I.E. Industrial Berhad's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 9.3% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is P.I.E. Industrial Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is P.I.E. Industrial Berhad Efficiently Re-investing Its Profits?

P.I.E. Industrial Berhad's low three-year median payout ratio of 23% (or a retention ratio of 77%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, P.I.E. Industrial Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 45% over the next three years. Regardless, the future ROE for P.I.E. Industrial Berhad is speculated to rise to 7.5% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we feel that the performance shown by P.I.E. Industrial Berhad can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings 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. 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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