Are Malaysian Pacific Industries Berhad's (KLSE:MPI) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
editorial-team@simplywallst.com (Simply Wall St)
4 min read
It is hard to get excited after looking at Malaysian Pacific Industries Berhad's (KLSE:MPI) recent performance, when its stock has declined 1.5% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Malaysian Pacific 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Malaysian Pacific Industries Berhad is:
2.9% = RM71m ÷ RM2.4b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.03 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Malaysian Pacific Industries Berhad's Earnings Growth And 2.9% ROE
It is hard to argue that Malaysian Pacific Industries Berhad's ROE is much good in and of itself. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. However, the moderate 6.4% net income growth seen by Malaysian Pacific Industries Berhad over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Malaysian Pacific Industries 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.
KLSE:MPI Past Earnings Growth November 18th 2023
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Malaysian Pacific Industries Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Malaysian Pacific Industries Berhad Making Efficient Use Of Its Profits?
Malaysian Pacific Industries Berhad's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Moreover, Malaysian Pacific Industries Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 26%. However, Malaysian Pacific Industries Berhad's ROE is predicted to rise to 12% despite there being no anticipated change in its payout ratio.
Summary
Overall, we feel that Malaysian Pacific Industries Berhad certainly does have some positive factors to consider. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this freereport on analyst forecasts for the company to find out more.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
