Do Fundamentals Have Any Role To Play In Driving Deleum Berhad's (KLSE:DELEUM) Stock Up Recently?

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

Sun, Nov 5, 2023, 7:33 PM 4 min read

Deleum Berhad's (KLSE:DELEUM) stock up by 8.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Deleum Berhad's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Deleum Berhad

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 Deleum Berhad is:

14% = RM57m ÷ RM423m (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.14.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Deleum Berhad's Earnings Growth And 14% ROE

At first glance, Deleum Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10.0%. Yet, Deleum Berhad has posted measly growth of 4.4% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Deleum Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 17% in the same period.

past-earnings-growth — KLSE:DELEUM Past Earnings Growth November 6th 2023

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. Doing so will help them establish if the stock's future looks promising or ominous. What is DELEUM worth today? The intrinsic value infographic in our free research report helps visualize whether DELEUM is currently mispriced by the market.

Is Deleum Berhad Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 47% (implying that the company retains the remaining 53% of its income), Deleum Berhad's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Deleum 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 48% of its profits over the next three years. Accordingly, forecasts suggest that Deleum Berhad's future ROE will be 12% which is again, similar to the current ROE.

Conclusion

In total, it does look like Deleum Berhad has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.