Could The Market Be Wrong About United Plantations Berhad (KLSE:UTDPLT) Given Its Attractive Financial Prospects?

With its stock down 1.5% over the past month, it is easy to disregard United Plantations Berhad (KLSE:UTDPLT). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to United Plantations 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for United Plantations Berhad

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for United Plantations Berhad is:

14% = RM382m ÷ RM2.7b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.14 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

A Side By Side comparison of United Plantations Berhad's Earnings Growth And 14% ROE

At first glance, United Plantations Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. Despite this, United Plantations Berhad's five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Given that the industry shrunk its earnings at a rate of 6.0% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if United Plantations Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is United Plantations Berhad Making Efficient Use Of Its Profits?

United Plantations Berhad has a low three-year median payout ratio of 24% (or a retention ratio of 76%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, United Plantations Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that United Plantations Berhad's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into United Plantations Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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