Can Mixed Fundamentals Have A Negative Impact on Malaysian Pacific Industries Berhad (KLSE:MPI) Current Share Price Momentum?

Most readers would already be aware that Malaysian Pacific Industries Berhad's (KLSE:MPI) stock increased significantly by 11% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Malaysian Pacific Industries Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Malaysian Pacific Industries Berhad

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Malaysian Pacific Industries Berhad is:

3.5% = RM86m ÷ RM2.4b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.04 in profit.

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. 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 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.

Malaysian Pacific Industries Berhad's Earnings Growth And 3.5% ROE

It is hard to argue that Malaysian Pacific Industries Berhad's ROE is much good in and of itself. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Malaysian Pacific Industries Berhad over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Malaysian Pacific Industries Berhad's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Malaysian Pacific Industries Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Malaysian Pacific Industries Berhad Efficiently Re-investing Its Profits?

Malaysian Pacific Industries Berhad's low three-year median payout ratio of 24%, (meaning the company retains76% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, Malaysian Pacific Industries Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 26%. Still, forecasts suggest that Malaysian Pacific Industries Berhad's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that the performance shown by Malaysian Pacific Industries Berhad can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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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.