Are Poor Financial Prospects Dragging Down Kuala Lumpur Kepong Berhad (KLSE:KLK Stock?

With its stock down 5.5% over the past month, it is easy to disregard Kuala Lumpur Kepong Berhad (KLSE:KLK). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Kuala Lumpur Kepong Berhad's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Kuala Lumpur Kepong Berhad

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 Kuala Lumpur Kepong Berhad is:

4.9% = RM738m ÷ RM15b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Kuala Lumpur Kepong Berhad's Earnings Growth And 4.9% ROE

As you can see, Kuala Lumpur Kepong Berhad's ROE looks pretty weak. Not just that, even compared to the industry average of 8.8%, the company's ROE is entirely unremarkable. Therefore, Kuala Lumpur Kepong Berhad's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Kuala Lumpur Kepong Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 19% in the same 5-year period, which is a bit concerning.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is KLK fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Kuala Lumpur Kepong Berhad Using Its Retained Earnings Effectively?

Kuala Lumpur Kepong Berhad has a high three-year median payout ratio of 65% (or a retention ratio of 35%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Kuala Lumpur Kepong Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 48% over the next three years. As a result, the expected drop in Kuala Lumpur Kepong Berhad's payout ratio explains the anticipated rise in the company's future ROE to 9.0%, over the same period.

Conclusion

On the whole, Kuala Lumpur Kepong Berhad's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.