Karyon Industries Berhad's (KLSE:KARYON) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Karyon Industries Berhad (KLSE:KARYON) has had a rough three months with its share price down 11%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Karyon Industries Berhad's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Karyon Industries 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 Karyon Industries Berhad is:

3.6% = RM3.7m ÷ RM103m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.04 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Karyon Industries Berhad's Earnings Growth And 3.6% ROE

It is quite clear that Karyon Industries Berhad's ROE is rather low. Even compared to the average industry ROE of 5.8%, the company's ROE is quite dismal. Hence, the flat earnings seen by Karyon Industries Berhad over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Karyon Industries Berhad compares quite favourably to the industry average, which shows a decline of 7.1% in the same period.

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

Is Karyon Industries Berhad Making Efficient Use Of Its Profits?

Karyon Industries Berhad's low three-year median payout ratio of 25%, (meaning the company retains75% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Moreover, Karyon Industries Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Karyon Industries Berhad has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Karyon Industries Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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