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

It is hard to get excited after looking at PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) recent performance, when its stock has declined 16% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study PETRONAS Chemicals Group Berhad's ROE in this article.

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.

View our latest analysis for PETRONAS Chemicals Group 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 PETRONAS Chemicals Group Berhad is:

2.3% = RM892m ÷ RM39b (Based on the trailing twelve months to September 2024).

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 MYR0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of PETRONAS Chemicals Group Berhad's Earnings Growth And 2.3% ROE

As you can see, PETRONAS Chemicals Group Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. Hence, the flat earnings seen by PETRONAS Chemicals Group 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 PETRONAS Chemicals Group Berhad's reported growth was a little less than the industry growth of1.6% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is PCHEM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is PETRONAS Chemicals Group Berhad Efficiently Re-investing Its Profits?

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

Moreover, PETRONAS Chemicals Group 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 60% of its profits over the next three years. Still, forecasts suggest that PETRONAS Chemicals Group Berhad's future ROE will rise to 5.8% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we would be extremely cautious before making any decision on PETRONAS Chemicals Group Berhad. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.