With its stock down 4.7% over the past three months, it is easy to disregard BP Plastics Holding Bhd (KLSE:BPPLAS). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study BP Plastics Holding 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.
View our latest analysis for BP Plastics Holding Bhd
How To Calculate Return On Equity?
ROE 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 BP Plastics Holding Bhd is:
12% = RM33m ÷ RM276m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.12 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. 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.
BP Plastics Holding Bhd's Earnings Growth And 12% ROE
At first glance, BP Plastics Holding Bhd seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. This certainly adds some context to BP Plastics Holding Bhd's decent 7.3% net income growth seen over the past five years.
We then compared BP Plastics Holding 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 18% in the same 5-year period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is BPPLAS worth today? The intrinsic value infographic in our free research report helps visualize whether BPPLAS is currently mispriced by the market.