Stock Analysis

Do Its Financials Have Any Role To Play In Driving Ta Ann Holdings Berhad's (KLSE:TAANN) Stock Up Recently?

KLSE:TAANN
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Ta Ann Holdings Berhad (KLSE:TAANN) has had a great run on the share market with its stock up by a significant 8.6% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Ta Ann Holdings Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Ta Ann Holdings 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 Ta Ann Holdings Berhad is:

6.6% = RM107m ÷ RM1.6b (Based on the trailing twelve months to September 2020).

The 'return' is the profit 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 MYR0.07 in profit.

Why Is ROE Important For Earnings Growth?

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

Ta Ann Holdings Berhad's Earnings Growth And 6.6% ROE

On the face of it, Ta Ann Holdings Berhad's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 4.2%, is definitely interesting. However, Ta Ann Holdings Berhad's five year net income decline rate was 25%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

As a next step, we compared Ta Ann Holdings Berhad's performance with the industry and found thatTa Ann Holdings Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 19% in the same period, which is a slower than the company.

past-earnings-growth
KLSE:TAANN Past Earnings Growth February 25th 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ta Ann Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Ta Ann Holdings Berhad Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 44% (or a retention ratio of 56%) which is pretty normal, Ta Ann Holdings Berhad's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Ta Ann Holdings 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 41% of its profits over the next three years. As a result, Ta Ann Holdings Berhad's ROE is not expected to change by much either, which we inferred from the analyst estimate of 6.6% for future ROE.

Conclusion

In total, it does look like Ta Ann Holdings Berhad has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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