Sarawak Plantation Berhad's (KLSE:SWKPLNT) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Sarawak Plantation Berhad (KLSE:SWKPLNT) has had a rough three months with its share price down 4.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Sarawak Plantation Berhad's ROE today.

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 Sarawak Plantation 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 Sarawak Plantation Berhad is:

9.4% = RM54m ÷ RM573m (Based on the trailing twelve months to September 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 MYR0.09.

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. 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 Sarawak Plantation Berhad's Earnings Growth And 9.4% ROE

At first glance, Sarawak Plantation Berhad's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 7.0% doesn't go unnoticed by us. Still, Sarawak Plantation Berhad's net income growth of 3.3% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Sarawak Plantation Berhad compares quite favourably to the industry average, which shows a decline of 5.7% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Sarawak Plantation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sarawak Plantation Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 63% (that is, the company retains only 37% of its income) over the past three years for Sarawak Plantation Berhad suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Sarawak Plantation 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 41% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Conclusion

On the whole, we do feel that Sarawak Plantation Berhad has some positive attributes. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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