Stock Analysis

Is SKP Resources Bhd's (KLSE:SKPRES) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

KLSE:SKPRES
Source: Shutterstock

Most readers would already be aware that SKP Resources Bhd's (KLSE:SKPRES) stock increased significantly by 54% over the past three months. 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 SKP Resources Bhd's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for SKP Resources Bhd

How Is ROE Calculated?

Return on equity 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 SKP Resources Bhd is:

10% = RM88m ÷ RM870m (Based on the trailing twelve months to December 2023).

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 MYR0.10 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. 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. 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 SKP Resources Bhd's Earnings Growth And 10% ROE

At first glance, SKP Resources Bhd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.7%. Even so, SKP Resources Bhd has shown a fairly decent growth in its net income which grew at a rate of 11%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared SKP Resources Bhd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same 5-year period, which is a bit concerning.

past-earnings-growth
KLSE:SKPRES Past Earnings Growth May 21st 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is SKPRES fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is SKP Resources Bhd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 49% (implying that the company retains 51% of its profits), it seems that SKP Resources Bhd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, SKP Resources Bhd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 51%. Regardless, the future ROE for SKP Resources Bhd is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that SKP Resources Bhd has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're helping make it simple.

Find out whether SKP Resources Bhd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.