Is Teck Guan Perdana Berhad's (KLSE:TECGUAN) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at Teck Guan Perdana Berhad's (KLSE:TECGUAN) recent performance, when its stock has declined 17% 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. Particularly, we will be paying attention to Teck Guan Perdana 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. 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 Teck Guan Perdana 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 Teck Guan Perdana Berhad is:

7.0% = RM4.2m ÷ RM59m (Based on the trailing twelve months to October 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.07 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. 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. 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.

Teck Guan Perdana Berhad's Earnings Growth And 7.0% ROE

On the face of it, Teck Guan Perdana Berhad's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.7%, so we won't completely dismiss the company. But then again, Teck Guan Perdana Berhad's five year net income shrunk at a rate of 11%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

As a next step, we compared Teck Guan Perdana Berhad's performance with the industry and found thatTeck Guan Perdana Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 6.3% in the same period, which is a slower than the company.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Teck Guan Perdana Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Teck Guan Perdana Berhad Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Teck Guan Perdana Berhad. 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 5 risks we have identified for Teck Guan Perdana 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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