Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Rubberex Corporation (M) Berhad (KLSE:RUBEREX)?

  •  Updated
KLSE:HEXCARE
Source: Shutterstock

Rubberex Corporation (M) Berhad (KLSE:RUBEREX) has had a rough month with its share price down 34%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Rubberex Corporation (M) Berhad's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Rubberex Corporation (M) Berhad

How To Calculate Return On Equity?

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 Rubberex Corporation (M) Berhad is:

15% = RM39m ÷ RM269m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Rubberex Corporation (M) Berhad's Earnings Growth And 15% ROE

To begin with, Rubberex Corporation (M) Berhad seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Despite the moderate return on equity, Rubberex Corporation (M) Berhad has posted a net income growth of 3.8% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Rubberex Corporation (M) Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.0% in the same period, which is a bit concerning.

past-earnings-growth
KLSE:RUBEREX Past Earnings Growth November 19th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Rubberex Corporation (M) Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Rubberex Corporation (M) Berhad Making Efficient Use Of Its Profits?

While Rubberex Corporation (M) Berhad has a decent three-year median payout ratio of 45% (or a retention ratio of 55%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Rubberex Corporation (M) Berhad 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 44%. Still, forecasts suggest that Rubberex Corporation (M) Berhad's future ROE will rise to 55% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Rubberex Corporation (M) Berhad certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

When trading Rubberex Corporation (M) Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Hextar Healthcare Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis