Are Strong Financial Prospects The Force That Is Driving The Momentum In Perak Transit Berhad's KLSE:PTRANS) Stock?

Most readers would already be aware that Perak Transit Berhad's (KLSE:PTRANS) stock increased significantly by 30% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Perak Transit Berhad's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Perak Transit Berhad

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 Perak Transit Berhad is:

12% = RM40m ÷ RM337m (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.12 in profit.

Why Is ROE Important For 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. 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.

Perak Transit Berhad's Earnings Growth And 12% ROE

To start with, Perak Transit Berhad's ROE looks acceptable. Especially when compared to the industry average of 6.0% the company's ROE looks pretty impressive. Probably as a result of this, Perak Transit Berhad was able to see a decent growth of 16% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 12% in the same period, the company's net income growth is pretty remarkable.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Perak Transit Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Perak Transit Berhad Using Its Retained Earnings Effectively?

Perak Transit Berhad has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Perak Transit Berhad has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 34%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 12%.

Summary

On the whole, we feel that Perak Transit Berhad's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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. 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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