SKP Resources Bhd's (KLSE:SKPRES) Stock Is Going Strong: Have Financials A Role To Play?

SKP Resources Bhd's (KLSE:SKPRES) stock is up by a considerable 20% 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. Specifically, we decided to study SKP Resources Bhd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for SKP Resources Bhd

How Do You Calculate Return On Equity?

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:

13% = RM84m ÷ RM665m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.13.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

SKP Resources Bhd's Earnings Growth And 13% ROE

To start with, SKP Resources Bhd's ROE looks acceptable. On comparing with the average industry ROE of 9.7% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for SKP Resources Bhd in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared SKP Resources Bhd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 1.3% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is SKP Resources Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SKP Resources Bhd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 52% (implying that the company keeps only 48% of its income) of its business to reinvest into its business), most of SKP Resources Bhd's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, SKP Resources Bhd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. Regardless, the future ROE for SKP Resources Bhd is predicted to rise to 23% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that SKP Resources Bhd certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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