Are Strong Financial Prospects The Force That Is Driving The Momentum In Southern Acids (M) Berhad's KLSE:SAB) Stock?

Most readers would already be aware that Southern Acids (M) Berhad's (KLSE:SAB) stock increased significantly by 6.1% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Southern Acids (M) Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Southern Acids (M) Berhad

How Is ROE Calculated?

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 Southern Acids (M) Berhad is:

7.5% = RM52m ÷ RM689m (Based on the trailing twelve months to September 2020).

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 MYR0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Southern Acids (M) Berhad's Earnings Growth And 7.5% ROE

On the face of it, Southern Acids (M) Berhad's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 5.8% doesn't go unnoticed by us. Still, Southern Acids (M) Berhad has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

Given that the industry shrunk its earnings at a rate of 3.9% in the same period, the net income growth of the company is quite impressive.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Southern Acids (M) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Southern Acids (M) Berhad Using Its Retained Earnings Effectively?

Southern Acids (M) Berhad has a low three-year median payout ratio of 21% (or a retention ratio of 79%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Southern Acids (M) 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.

Summary

On the whole, we feel that Southern Acids (M) Berhad's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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 Southern Acids (M) 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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