Batu Kawan Berhad's (KLSE:BKAWAN) Financial Prospects Don't Look Very Positive: Could It Mean A Stock Price Drop In The Future?

By
Simply Wall St
Published
October 14, 2020
KLSE:BKAWAN

Batu Kawan Berhad's (KLSE:BKAWAN) stock is up by 4.8% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Batu Kawan Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Batu Kawan 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 Batu Kawan Berhad is:

7.1% = RM897m ÷ RM13b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Batu Kawan Berhad's Earnings Growth And 7.1% ROE

On the face of it, Batu Kawan Berhad's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.2%, so we won't completely dismiss the company. But then again, Batu Kawan Berhad's five year net income shrunk at a rate of 16%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.5% in the same period, we still found Batu Kawan Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth
KLSE:BKAWAN Past Earnings Growth October 14th 2020

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Batu Kawan Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Batu Kawan Berhad Efficiently Re-investing Its Profits?

Batu Kawan Berhad's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 59% (or a retention ratio of 41%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for Batu Kawan Berhad by visiting our risks dashboard for free on our platform here.

Additionally, Batu Kawan 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.

Summary

In total, we would have a hard think before deciding on any investment action concerning Batu Kawan Berhad. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Batu Kawan Berhad and see how it has performed in the past by looking at this FREE detailed graph 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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