Is Carlsberg Brewery Malaysia Berhad's (KLSE:CARLSBG) Recent Price Movement Underpinned By Its Weak Fundamentals?

Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) has had a rough month with its share price down 6.1%. 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. Particularly, we will be paying attention to Carlsberg Brewery Malaysia Berhad's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Carlsberg Brewery Malaysia Berhad

How To Calculate Return On Equity?

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 Carlsberg Brewery Malaysia Berhad is:

77% = RM160m ÷ RM207m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.77 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Carlsberg Brewery Malaysia Berhad's Earnings Growth And 77% ROE

Firstly, we acknowledge that Carlsberg Brewery Malaysia Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 15% also doesn't go unnoticed by us. Despite this, Carlsberg Brewery Malaysia Berhad's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital

Next, on comparing with the industry net income growth, we found that Carlsberg Brewery Malaysia Berhad's reported growth was a little less than the industry growth of1.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is CARLSBG worth today? The intrinsic value infographic in our free research report helps visualize whether CARLSBG is currently mispriced by the market.

Is Carlsberg Brewery Malaysia Berhad Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 99% (implying that the company keeps only 0.8% of its income) of its business to reinvest into its business), most of Carlsberg Brewery Malaysia Berhad's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Carlsberg Brewery Malaysia Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 99% of its profits over the next three years. Regardless, the future ROE for Carlsberg Brewery Malaysia Berhad is predicted to rise to 160% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that the performance shown by Carlsberg Brewery Malaysia Berhad can be open to many interpretations. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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.
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