Kuala Lumpur Kepong Berhad's (KLSE:KLK) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Most readers would already know that Kuala Lumpur Kepong Berhad's (KLSE:KLK) stock increased by 2.1% over the past month. 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 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Kuala Lumpur Kepong Berhad

How Do You 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 Kuala Lumpur Kepong Berhad is:

4.8% = RM773m ÷ RM16b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Kuala Lumpur Kepong Berhad's Earnings Growth And 4.8% ROE

It is quite clear that Kuala Lumpur Kepong Berhad's ROE is rather low. Even when compared to the industry average of 7.4%, the ROE figure is pretty disappointing. However, the moderate 19% net income growth seen by Kuala Lumpur Kepong Berhad over the past five years is definitely a positive. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

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 25% in the same 5-year period, which is a bit concerning.

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. Is Kuala Lumpur Kepong Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kuala Lumpur Kepong Berhad Efficiently Re-investing Its Profits?

Kuala Lumpur Kepong Berhad has a three-year median payout ratio of 50%, which implies that it retains the remaining 50% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Kuala Lumpur Kepong 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 49% of its profits over the next three years. Still, forecasts suggest that Kuala Lumpur Kepong Berhad's future ROE will rise to 9.0% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Kuala Lumpur Kepong Berhad has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.