KPJ Healthcare Berhad's (KLSE:KPJ) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

KPJ Healthcare Berhad (KLSE:KPJ) has had a great run on the share market with its stock up by a significant 31% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on KPJ Healthcare Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for KPJ Healthcare Berhad

How Is ROE Calculated?

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 KPJ Healthcare Berhad is:

12% = RM303m ÷ RM2.5b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.12.

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 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 KPJ Healthcare Berhad's Earnings Growth And 12% ROE

At first glance, KPJ Healthcare Berhad seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Despite the moderate return on equity, KPJ Healthcare Berhad has posted a net income growth of 2.6% over the past five years. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared KPJ Healthcare Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 22% in the same period.

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. Is KPJ fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is KPJ Healthcare Berhad Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 48% (implying that the company retains the remaining 52% of its income), KPJ Healthcare Berhad'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.

Additionally, KPJ Healthcare 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 is expected to keep paying out approximately 53% of its profits over the next three years. As a result, KPJ Healthcare Berhad's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Summary

In total, it does look like KPJ Healthcare Berhad has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.