Mynews Holdings Berhad's (KLSE:MYNEWS) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

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

Wed, Sep 25, 2024, 6:55 PM 4 min read

Mynews Holdings Berhad's (KLSE:MYNEWS) stock is up by a considerable 9.3% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Mynews Holdings Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Mynews Holdings 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 Mynews Holdings Berhad is:

2.0% = RM4.9m ÷ RM241m (Based on the trailing twelve months to July 2024).

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 MYR0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Mynews Holdings Berhad's Earnings Growth And 2.0% ROE

It is quite clear that Mynews Holdings Berhad's ROE is rather low. Even compared to the average industry ROE of 9.0%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 21% seen by Mynews Holdings Berhad over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Mynews Holdings Berhad's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 20% in the same period. This is quite worrisome.

past-earnings-growth — KLSE:MYNEWS Past Earnings Growth September 26th 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. This then helps them determine if the stock is placed for a bright or bleak future. What is MYNEWS worth today? The intrinsic value infographic in our free research report helps visualize whether MYNEWS is currently mispriced by the market.

Is Mynews Holdings Berhad Using Its Retained Earnings Effectively?

With a high LTM (or last twelve month) payout ratio of 57% (implying that 43% of the profits are retained), most of Mynews Holdings Berhad's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Additionally, Mynews Holdings Berhad has paid dividends over a period of eight years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 34% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 9.6%, over the same period.

Summary

On the whole, Mynews Holdings Berhad's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.