Is The Market Rewarding Y&G Corporation Bhd. (KLSE:Y&G) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

By
Simply Wall St
Published
November 28, 2021
KLSE:Y&G
Source: Shutterstock

Y&G Corporation Bhd (KLSE:Y&G) has had a rough week with its share price down 18%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Y&G Corporation Bhd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Y&G Corporation Bhd

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 Y&G Corporation Bhd is:

1.7% = RM5.0m ÷ RM299m (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Y&G Corporation Bhd's Earnings Growth And 1.7% ROE

As you can see, Y&G Corporation Bhd's ROE looks pretty weak. Even compared to the average industry ROE of 4.9%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 33% seen by Y&G Corporation Bhd over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared Y&G Corporation Bhd's performance with the industry and found thatY&G Corporation Bhd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 9.9% in the same period, which is a slower than the company.

past-earnings-growth
KLSE:Y&G Past Earnings Growth November 29th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Y&G Corporation Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Y&G Corporation Bhd Making Efficient Use Of Its Profits?

Because Y&G Corporation Bhd doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

Overall, we have mixed feelings about Y&G Corporation Bhd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Y&G Corporation Bhd visit our risks dashboard for free.

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