Is The Market Rewarding Dayang Enterprise Holdings Bhd (KLSE:DAYANG) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

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

Wed, Jan 3, 2024, 5:43 PM 4 min read

Dayang Enterprise Holdings Bhd (KLSE:DAYANG) has had a rough three months with its share price down 10%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Dayang Enterprise Holdings Bhd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Dayang Enterprise Holdings Bhd

How To Calculate Return On Equity?

Return on equity 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 Dayang Enterprise Holdings Bhd is:

8.4% = RM154m ÷ RM1.8b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Dayang Enterprise Holdings Bhd's Earnings Growth And 8.4% ROE

When you first look at it, Dayang Enterprise Holdings Bhd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.6%, so we won't completely dismiss the company. But then again, Dayang Enterprise Holdings Bhd's five year net income shrunk at a rate of 32%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

That being said, we compared Dayang Enterprise Holdings Bhd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same 5-year period.

past-earnings-growth — KLSE:DAYANG Past Earnings Growth January 4th 2024

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is DAYANG worth today? The intrinsic value infographic in our free research report helps visualize whether DAYANG is currently mispriced by the market.

Is Dayang Enterprise Holdings Bhd Efficiently Re-investing Its Profits?

Despite having a normal LTM (or last twelve month) payout ratio of 25% (where it is retaining 75% of its profits), Dayang Enterprise Holdings Bhd 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.

Additionally, Dayang Enterprise Holdings Bhd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 18% over the next three years. The fact that the company's ROE is expected to rise to 11% over the same period is explained by the drop in the payout ratio.

Summary

On the whole, we feel that the performance shown by Dayang Enterprise Holdings Bhd can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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.