Y.S.P. Southeast Asia Holding Berhad (KLSE:YSPSAH) On An Uptrend: Could Fundamentals Be Driving The Stock?

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

Tue, Apr 2, 2024, 7:23 PM 4 min read

Most readers would already know that Y.S.P. Southeast Asia Holding Berhad's (KLSE:YSPSAH) stock increased by 5.2% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Y.S.P. Southeast Asia Holding Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Y.S.P. Southeast Asia Holding 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 Y.S.P. Southeast Asia Holding Berhad is:

9.4% = RM38m ÷ RM401m (Based on the trailing twelve months to December 2023).

The 'return' is the profit 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 MYR0.09 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Y.S.P. Southeast Asia Holding Berhad's Earnings Growth And 9.4% ROE

On the face of it, Y.S.P. Southeast Asia Holding Berhad's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.5%, so we won't completely dismiss the company. Having said that, Y.S.P. Southeast Asia Holding Berhad has shown a modest net income growth of 8.1% over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Y.S.P. Southeast Asia Holding Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.9% in the same period.

past-earnings-growth — KLSE:YSPSAH Past Earnings Growth April 3rd 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Y.S.P. Southeast Asia Holding Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Y.S.P. Southeast Asia Holding Berhad Making Efficient Use Of Its Profits?

Y.S.P. Southeast Asia Holding Berhad has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% 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.

Moreover, Y.S.P. Southeast Asia Holding 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.

Conclusion

On the whole, we do feel that Y.S.P. Southeast Asia Holding Berhad has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Y.S.P. Southeast Asia Holding Berhad by visiting our risks dashboard for free on our platform here.

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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.