Sime Darby Plantation Berhad's (KLSE:SIMEPLT) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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

Sun, Nov 12, 2023, 6:46 PM 4 min read

Sime Darby Plantation Berhad (KLSE:SIMEPLT) has had a rough three months with its share price down 3.3%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Sime Darby Plantation 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Sime Darby Plantation Berhad

How Is ROE Calculated?

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 Sime Darby Plantation Berhad is:

7.2% = RM1.4b ÷ RM20b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.07 in profit.

What Has ROE Got To Do With 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. 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.

Sime Darby Plantation Berhad's Earnings Growth And 7.2% ROE

At first glance, Sime Darby Plantation Berhad's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.6%. Moreover, we are quite pleased to see that Sime Darby Plantation Berhad's net income grew significantly at a rate of 23% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Sime Darby Plantation Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 23% in the same 5-year period.

past-earnings-growth — KLSE:SIMEPLT Past Earnings Growth November 13th 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for SIMEPLT? You can find out in our latest intrinsic value infographic research report.

Is Sime Darby Plantation Berhad Efficiently Re-investing Its Profits?

Sime Darby Plantation Berhad has a three-year median payout ratio of 50% (where it is retaining 50% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Sime Darby Plantation Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Sime Darby Plantation Berhad has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. 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 52%. Accordingly, forecasts suggest that Sime Darby Plantation Berhad's future ROE will be 8.5% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that Sime Darby Plantation Berhad has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.