Is FoundPac Group Berhad's (KLSE:FPGROUP) Stock On A Downtrend As A Result Of Its Poor Financials?

It is hard to get excited after looking at FoundPac Group Berhad's (KLSE:FPGROUP) recent performance, when its stock has declined 12% over the past week. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on FoundPac Group Berhad's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for FoundPac Group Berhad

How Do You Calculate Return On Equity?

ROE 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 FoundPac Group Berhad is:

4.2% = RM4.5m ÷ RM108m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.04.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of FoundPac Group Berhad's Earnings Growth And 4.2% ROE

As you can see, FoundPac Group Berhad's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 5.0% either. Therefore, it might not be wrong to say that the five year net income decline of 16% seen by FoundPac Group Berhad was possibly a result of the disappointing ROE.

However, when we compared FoundPac Group Berhad's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.9% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 FoundPac Group Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is FoundPac Group Berhad Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 74% (implying that 26% of the profits are retained), most of FoundPac Group Berhad's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for FoundPac Group Berhad by visiting our risks dashboard for free on our platform here.

Additionally, FoundPac Group Berhad has paid dividends over a period of eight years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning FoundPac Group Berhad. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on FoundPac Group 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.