Is PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) Recent Performance Underpinned By Weak Financials?

PETRONAS Chemicals Group Berhad (KLSE:PCHEM) has had a rough month with its share price down 12%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on PETRONAS Chemicals Group Berhad's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for PETRONAS Chemicals Group Berhad

How To Calculate Return On Equity?

Return on equity 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 PETRONAS Chemicals Group Berhad is:

4.9% = RM2.1b ÷ RM43b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of PETRONAS Chemicals Group Berhad's Earnings Growth And 4.9% ROE

It is hard to argue that PETRONAS Chemicals Group Berhad's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 5.3% either. Thus, the low ROE certainly provides some context to PETRONAS Chemicals Group Berhad's very little net income growth of 3.1% seen over the past five years.

We then compared PETRONAS Chemicals Group 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 6.5% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is PCHEM worth today? The intrinsic value infographic in our free research report helps visualize whether PCHEM is currently mispriced by the market.

Is PETRONAS Chemicals Group Berhad Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 54% (that is, the company retains only 46% of its income) over the past three years for PETRONAS Chemicals Group Berhad suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, PETRONAS Chemicals Group 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 59% of its profits over the next three years. Still, forecasts suggest that PETRONAS Chemicals Group Berhad's future ROE will rise to 7.1% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we would have a hard think before deciding on any investment action concerning PETRONAS Chemicals Group 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.