PETRONAS Dagangan Berhad's (KLSE:PETDAG) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

PETRONAS Dagangan Berhad's (KLSE:PETDAG) stock is up by a considerable 12% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study PETRONAS Dagangan 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.

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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 PETRONAS Dagangan Berhad is:

20% = RM1.2b ÷ RM5.9b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.20.

Check out our latest analysis for PETRONAS Dagangan Berhad

Why Is ROE Important For 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 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.

PETRONAS Dagangan Berhad's Earnings Growth And 20% ROE

To begin with, PETRONAS Dagangan Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.4%. This probably laid the ground for PETRONAS Dagangan Berhad's significant 23% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared PETRONAS Dagangan 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 29% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if PETRONAS Dagangan Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is PETRONAS Dagangan Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 84% (implying that it keeps only 16% of profits) for PETRONAS Dagangan Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, PETRONAS Dagangan Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 89%. Accordingly, forecasts suggest that PETRONAS Dagangan Berhad's future ROE will be 18% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that PETRONAS Dagangan Berhad has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.

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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.