Supreme Consolidated Resources Berhad's (KLSE:SUPREME) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Supreme Consolidated Resources Berhad (KLSE:SUPREME) has had a rough week with its share price down 11%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Supreme Consolidated Resources Berhad's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Supreme Consolidated Resources 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 Supreme Consolidated Resources Berhad is:

11% = RM10m ÷ RM93m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.11.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Supreme Consolidated Resources Berhad's Earnings Growth And 11% ROE

On the face of it, Supreme Consolidated Resources Berhad's ROE is not much to talk about. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. On the other hand, Supreme Consolidated Resources Berhad reported a moderate 11% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Supreme Consolidated Resources Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Supreme Consolidated Resources Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Supreme Consolidated Resources Berhad Using Its Retained Earnings Effectively?

Supreme Consolidated Resources Berhad has a healthy combination of a moderate three-year median payout ratio of 43% (or a retention ratio of 57%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Supreme Consolidated Resources Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 41%. Regardless, the future ROE for Supreme Consolidated Resources Berhad is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Supreme Consolidated Resources Berhad certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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 3 risks we have identified for Supreme Consolidated Resources Berhad visit our risks dashboard for free.

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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.