Is Pan-United Corporation Ltd's (SGX:P52) Recent Stock Performance Tethered To Its Strong Fundamentals?

Pan-United's (SGX:P52) stock is up by a considerable 17% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Pan-United'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Pan-United

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 Pan-United is:

16% = S$40m ÷ S$246m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.16 in profit.

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. 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.

Pan-United's Earnings Growth And 16% ROE

To start with, Pan-United's ROE looks acceptable. On comparing with the average industry ROE of 5.8% the company's ROE looks pretty remarkable. Probably as a result of this, Pan-United was able to see an impressive net income growth of 27% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Pan-United's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 33% over the last few years.

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. What is P52 worth today? The intrinsic value infographic in our free research report helps visualize whether P52 is currently mispriced by the market.

Is Pan-United Making Efficient Use Of Its Profits?

Pan-United's three-year median payout ratio is a pretty moderate 45%, meaning the company retains 55% of its income. By the looks of it, the dividend is well covered and Pan-United is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Pan-United has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 46%. As a result, Pan-United's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Conclusion

In total, we are pretty happy with Pan-United's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.