KPJ Healthcare Berhad's (KLSE:KPJ) Stock Is Going Strong: Have Financials A Role To Play?

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

Tue, Mar 5, 2024, 5:40 PM 4 min read

Most readers would already be aware that KPJ Healthcare Berhad's (KLSE:KPJ) stock increased significantly by 25% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, 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. In this article, we decided to focus on KPJ Healthcare Berhad's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for KPJ Healthcare Berhad

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for KPJ Healthcare Berhad is:

12% = RM303m ÷ RM2.5b (Based on the trailing twelve months to December 2023).

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?

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.

KPJ Healthcare Berhad's Earnings Growth And 12% ROE

To start with, KPJ Healthcare Berhad's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. KPJ Healthcare Berhad's decent returns aren't reflected in KPJ Healthcare Berhad'smediocre five year net income growth average of 2.6%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that KPJ Healthcare Berhad's reported growth was lower than the industry growth of 22% over the last few years, which is not something we like to see.

past-earnings-growth — KLSE:KPJ Past Earnings Growth March 6th 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. Has the market priced in the future outlook for KPJ? You can find out in our latest intrinsic value infographic research report.

Is KPJ Healthcare Berhad Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 48% (or a retention ratio of 52% over the past three years, KPJ Healthcare Berhad has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, KPJ Healthcare Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 53%. Accordingly, forecasts suggest that KPJ Healthcare Berhad's future ROE will be 12% which is again, similar to the current ROE.

Conclusion

In total, it does look like KPJ Healthcare 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.