Apollo Food Holdings Berhad's (KLSE:APOLLO) stock is up by 2.7% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Specifically, we decided to study Apollo Food Holdings Berhad's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Apollo Food Holdings Berhad
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Apollo Food Holdings Berhad is:
6.2% = RM14m ÷ RM231m (Based on the trailing twelve months to July 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 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. 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.
A Side By Side comparison of Apollo Food Holdings Berhad's Earnings Growth And 6.2% ROE
At first glance, Apollo Food Holdings Berhad's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Hence, the flat earnings seen by Apollo Food Holdings 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 the industry grew its earnings by 11% in the same period.
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. If you're wondering about Apollo Food Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Apollo Food Holdings Berhad Efficiently Re-investing Its Profits?
Apollo Food Holdings Berhad has a very high three-year median payout ratio of 120% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence of growth in Apollo Food Holdings Berhad's earnings therefore, doesn't come as a surprise. Paying a dividend higher than reported profits is not a sustainable move. This is quite a risky position to be in. You can see the 3 risks we have identified for Apollo Food Holdings Berhad by visiting our risks dashboard for free on our platform here.