LPI Capital Bhd's (KLSE:LPI) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that LPI Capital Bhd's (KLSE:LPI) stock increased significantly by 9.0% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to LPI Capital Bhd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for LPI Capital Bhd

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 LPI Capital Bhd is:

16% = RM382m ÷ RM2.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.16 in profit.

What Is The Relationship Between ROE And 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.

LPI Capital Bhd's Earnings Growth And 16% ROE

To start with, LPI Capital Bhd's ROE looks acceptable. Even when compared to the industry average of 16% the company's ROE looks quite decent. However, we are curious as to how LPI Capital Bhd's decent returns still resulted in flat growth for LPI Capital Bhd in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 9.4% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is LPI worth today? The intrinsic value infographic in our free research report helps visualize whether LPI is currently mispriced by the market.

Is LPI Capital Bhd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 84% (implying that the company keeps only 16% of its income) of its business to reinvest into its business), most of LPI Capital Bhd's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, LPI Capital Bhd 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. 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 83%. As a result, LPI Capital Bhd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Summary

In total, it does look like LPI Capital Bhd has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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.