Are Southern Cable Group Berhad's (KLSE:SCGBHD) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

By
Simply Wall St
Published
November 27, 2021
KLSE:SCGBHD
Source: Shutterstock

With its stock down 17% over the past month, it is easy to disregard Southern Cable Group Berhad (KLSE:SCGBHD). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Southern Cable Group 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Southern Cable 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 Southern Cable Group Berhad is:

6.9% = RM19m ÷ RM271m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.07 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. 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.

Southern Cable Group Berhad's Earnings Growth And 6.9% ROE

At first glance, Southern Cable Group Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.6%, so we won't completely dismiss the company. On the other hand, Southern Cable Group Berhad reported a fairly low 4.5% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Given that the industry shrunk its earnings at a rate of 2.0% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
KLSE:SCGBHD Past Earnings Growth November 28th 2021

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. Is Southern Cable Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Southern Cable Group Berhad Efficiently Re-investing Its Profits?

Southern Cable Group 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 fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Southern Cable Group Berhad only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that Southern Cable Group Berhad certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Southern Cable Group Berhad visit our risks dashboard for free.

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