Is Spritzer Bhd's (KLSE:SPRITZER) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at Spritzer Bhd's (KLSE:SPRITZER) recent performance, when its stock has declined 6.7% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. 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. Specifically, we decided to study Spritzer Bhd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Spritzer Bhd

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 Spritzer Bhd is:

6.2% = RM26m ÷ RM428m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.06.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Spritzer Bhd's Earnings Growth And 6.2% ROE

At first glance, Spritzer Bhd's ROE doesn't look very promising. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Spritzer Bhd's low net income growth of 2.7% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Spritzer Bhd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.1% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Spritzer Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Spritzer Bhd Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 30% (implying that the company retains the remaining 70% of its income), Spritzer Bhd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Spritzer Bhd 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%.

Summary

Overall, we have mixed feelings about Spritzer Bhd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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