Is PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 8.5% over the past three months, it is easy to disregard PETRONAS Chemicals Group Berhad (KLSE:PCHEM). 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 PETRONAS Chemicals Group Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for PETRONAS Chemicals Group Berhad

How To Calculate Return On Equity?

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 PETRONAS Chemicals Group Berhad is:

4.6% = RM1.9b ÷ RM42b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. 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?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

PETRONAS Chemicals Group Berhad's Earnings Growth And 4.6% 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 5.7% either. However, the modest 5.2% net income growth seen by PETRONAS Chemicals Group Berhad over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that PETRONAS Chemicals Group Berhad's reported growth was lower than the industry growth of 7.1% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 52% (or a retention ratio of 48%) for PETRONAS Chemicals Group Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, PETRONAS Chemicals Group Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 57%. Still, forecasts suggest that PETRONAS Chemicals Group Berhad's future ROE will rise to 7.5% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we have mixed feelings about PETRONAS Chemicals Group Berhad. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com