Scientex Packaging (Ayer Keroh) Berhad (KLSE:SCIPACK) has had a rough three months with its share price down 2.2%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Scientex Packaging (Ayer Keroh) 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Scientex Packaging (Ayer Keroh) Berhad

How Is ROE Calculated?

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 Scientex Packaging (Ayer Keroh) Berhad is:

12% = RM48m ÷ RM408m (Based on the trailing twelve months to April 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.12 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. 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 Scientex Packaging (Ayer Keroh) Berhad's Earnings Growth And 12% ROE

To start with, Scientex Packaging (Ayer Keroh) Berhad's ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Scientex Packaging (Ayer Keroh) Berhad.

Next, on comparing Scientex Packaging (Ayer Keroh) Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Scientex Packaging (Ayer Keroh) Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Scientex Packaging (Ayer Keroh) Berhad Efficiently Re-investing Its Profits?

Scientex Packaging (Ayer Keroh) Berhad has a three-year median payout ratio of 33%, which implies that it retains the remaining 67% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Scientex Packaging (Ayer Keroh) Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Scientex Packaging (Ayer Keroh) Berhad's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Scientex Packaging (Ayer Keroh) Berhad.

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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.