Stock Analysis

Kretam Holdings Berhad (KLSE:KRETAM) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

KLSE:KRETAM
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Most readers would already know that Kretam Holdings Berhad's (KLSE:KRETAM) stock increased by 8.9% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to Kretam Holdings Berhad's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Kretam Holdings 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 Kretam Holdings Berhad is:

7.1% = RM46m ÷ RM639m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.07 in profit.

Why Is ROE Important For 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 Kretam Holdings Berhad's Earnings Growth And 7.1% ROE

At first glance, Kretam Holdings Berhad's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.1%, we may spare it some thought. But then again, Kretam Holdings Berhad's five year net income shrunk at a rate of 10%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Kretam Holdings Berhad's performance with the industry and found thatKretam Holdings Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 6.0% in the same period, which is a slower than the company.

past-earnings-growth
KLSE:KRETAM Past Earnings Growth December 23rd 2020

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. If you're wondering about Kretam Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kretam Holdings Berhad Making Efficient Use Of Its Profits?

Because Kretam Holdings Berhad doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, we're a bit ambivalent about Kretam Holdings Berhad's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Kretam Holdings Berhad visit our risks dashboard for free.

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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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