Could The Market Be Wrong About Fraser & Neave Holdings Bhd (KLSE:F&N) Given Its Attractive Financial Prospects?

editorial-team@simplywallst.com (Simply Wall St)

Fri, Jan 31, 2025, 5:26 PM 4 min read

Fraser & Neave Holdings Bhd (KLSE:F&N) has had a rough three months with its share price down 18%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Fraser & Neave Holdings Bhd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Fraser & Neave Holdings 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 Fraser & Neave Holdings Bhd is:

15% = RM544m ÷ RM3.6b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.15 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Fraser & Neave Holdings Bhd's Earnings Growth And 15% ROE

To begin with, Fraser & Neave Holdings Bhd seems to have a respectable ROE. Even so, when compared with the average industry ROE of 19%, we aren't very excited. Fraser & Neave Holdings Bhd was still able to see a decent net income growth of 7.8% over the past five years. So, there might be other aspects that are positively influencing earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.

Next, on comparing Fraser & Neave Holdings Bhd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.4% over the last few years.

past-earnings-growth — KLSE:F&N Past Earnings Growth February 1st 2025

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Fraser & Neave Holdings Bhd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fraser & Neave Holdings Bhd Efficiently Re-investing Its Profits?

Fraser & Neave Holdings Bhd has a three-year median payout ratio of 44%, which implies that it retains the remaining 56% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Fraser & Neave Holdings Bhd 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 15%.

Summary

On the whole, we feel that Fraser & Neave Holdings Bhd's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.