Scientex Berhad's (KLSE:SCIENTX) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at Scientex Berhad's (KLSE:SCIENTX) recent performance, when its stock has declined 2.2% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Scientex Berhad's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Scientex Berhad

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Scientex Berhad is:

15% = RM430m ÷ RM2.9b (Based on the trailing twelve months to October 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.15 in profit.

Why Is ROE Important For Earnings Growth?

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

Scientex Berhad's Earnings Growth And 15% ROE

To begin with, Scientex Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.8%. This certainly adds some context to Scientex Berhad's decent 13% net income growth seen over the past five years.

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

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). This then helps them determine if the stock is placed for a bright or bleak future. Is SCIENTX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Scientex Berhad Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 30% (implying that the company retains 70% of its profits), it seems that Scientex Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Scientex Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. As a result, Scientex Berhad's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Summary

On the whole, we feel that Scientex Berhad's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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