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

With its stock down 14% over the past three months, it is easy to disregard FoundPac Group Berhad (KLSE:FPGROUP). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to FoundPac Group 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for FoundPac Group Berhad

How To 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 FoundPac Group Berhad is:

12% = RM13m ÷ RM102m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.12.

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. 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.

FoundPac Group Berhad's Earnings Growth And 12% ROE

At first glance, FoundPac Group Berhad seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This probably goes some way in explaining FoundPac Group Berhad's moderate 7.7% growth over the past five years amongst other factors.

We then performed a comparison between FoundPac Group Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.4% 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. Has the market priced in the future outlook for FPGROUP? You can find out in our latest intrinsic value infographic research report

Is FoundPac Group Berhad Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 53% (or a retention ratio of 47%) for FoundPac Group Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, FoundPac Group Berhad has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with FoundPac Group Berhad's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of FoundPac Group 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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