CRG Incorporated Berhad's (KLSE:CRG) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

CRG Berhad's (KLSE:CRG) stock is up by a considerable 33% over the past week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study CRG Berhad's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for CRG Berhad

How Is ROE Calculated?

The formula for ROE is:

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

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

4.2% = RM3.0m ÷ RM72m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

CRG Berhad's Earnings Growth And 4.2% ROE

As you can see, CRG Berhad's ROE looks pretty weak. Even when compared to the industry average of 9.3%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 19% seen by CRG Berhad over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared CRG Berhad's performance with the industry and found thatCRG Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 2.2% in the same period, which is a slower than the company.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 CRG Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is CRG Berhad Using Its Retained Earnings Effectively?

CRG Berhad has a high three-year median payout ratio of 65% (that is, it is retaining 35% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 5 risks we have identified for CRG Berhad.

Only recently, CRG Berhad stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Summary

In total, we would have a hard think before deciding on any investment action concerning CRG Berhad. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on CRG Berhad and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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