Dutch Lady Milk Industries Berhad's (KLSE:DLADY) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
editorial-team@simplywallst.com (Simply Wall St)
4 min read
With its stock down 5.2% over the past month, it is easy to disregard Dutch Lady Milk Industries Berhad (KLSE:DLADY). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Dutch Lady Milk Industries Berhad's ROE today.
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.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Dutch Lady Milk Industries Berhad is:
19% = RM88m ÷ RM470m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.19 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Dutch Lady Milk Industries Berhad's Earnings Growth And 19% ROE
To start with, Dutch Lady Milk Industries Berhad's ROE looks acceptable. On comparing with the average industry ROE of 10.0% the company's ROE looks pretty remarkable. For this reason, Dutch Lady Milk Industries Berhad's five year net income decline of 3.5% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
So, as a next step, we compared Dutch Lady Milk Industries Berhad's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 22% over the last few years.
KLSE:DLADY Past Earnings Growth November 2nd 2024
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. 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 Dutch Lady Milk Industries Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Dutch Lady Milk Industries Berhad Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 38% (where it is retaining 62% of its profits), Dutch Lady Milk Industries Berhad has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Dutch Lady Milk Industries Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 44% of its profits over the next three years. Regardless, the future ROE for Dutch Lady Milk Industries Berhad is predicted to rise to 27% despite there being not much change expected in its payout ratio.
Conclusion
In total, it does look like Dutch Lady Milk Industries Berhad has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.
