PETRONAS Dagangan Berhad's (KLSE:PETDAG) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

PETRONAS Dagangan Berhad (KLSE:PETDAG) has had a great run on the share market with its stock up by a significant 11% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study PETRONAS Dagangan Berhad'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. 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?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for PETRONAS Dagangan Berhad is:

18% = RM1.1b ÷ RM6.1b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.18 in profit.

Check out our latest analysis for PETRONAS Dagangan Berhad

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

PETRONAS Dagangan Berhad's Earnings Growth And 18% ROE

To start with, PETRONAS Dagangan Berhad's ROE looks acceptable. On comparing with the average industry ROE of 8.8% the company's ROE looks pretty remarkable. Probably as a result of this, PETRONAS Dagangan Berhad was able to see a decent growth of 19% over the last five years.

Next, on comparing PETRONAS Dagangan Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. What is PETDAG worth today? The intrinsic value infographic in our free research report helps visualize whether PETDAG is currently mispriced by the market.

Is PETRONAS Dagangan Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 87% (or a retention ratio of 13%) for PETRONAS Dagangan Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, PETRONAS Dagangan Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 94% of its profits over the next three years. Accordingly, forecasts suggest that PETRONAS Dagangan Berhad's future ROE will be 17% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with PETRONAS Dagangan Berhad's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.