Are Asia Poly Holdings Berhad's (KLSE:ASIAPLY) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 42% over the past three months, it is easy to disregard Asia Poly Holdings Berhad (KLSE:ASIAPLY). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. 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 Asia Poly Holdings 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 Asia Poly Holdings Berhad

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Asia Poly Holdings Berhad is:

5.1% = RM6.7m ÷ RM130m (Based on the trailing twelve months to September 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 MYR0.05 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 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.

Asia Poly Holdings Berhad's Earnings Growth And 5.1% ROE

It is quite clear that Asia Poly Holdings Berhad's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.8%. Therefore, it might not be wrong to say that the five year net income decline of 48% seen by Asia Poly Holdings Berhad was possibly a result of the disappointing ROE.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 7.1% in the same period, we found that Asia Poly Holdings Berhad's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

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. Is Asia Poly Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Asia Poly Holdings Berhad Using Its Retained Earnings Effectively?

Asia Poly Holdings Berhad doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

In total, we're a bit ambivalent about Asia Poly Holdings Berhad's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 Asia Poly Holdings 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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