It is hard to get excited after looking at Master-Pack Group Berhad’s (KLSE:MASTER) recent performance, when its stock has declined 9.2% over the past three months. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Master-Pack Group Berhad’s ROE.
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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Master-Pack Group Berhad is:
9.9% = RM11m ÷ RM113m (Based on the trailing twelve months to December 2020).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.10 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. 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 Master-Pack Group Berhad’s Earnings Growth And 9.9% ROE
When you first look at it, Master-Pack Group Berhad’s ROE doesn’t look that attractive. However, its ROE is similar to the industry average of 9.0%, so we won’t completely dismiss the company. Moreover, we are quite pleased to see that Master-Pack Group Berhad’s net income grew significantly at a rate of 37% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company’s earnings 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.
We then compared Master-Pack Group Berhad’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 4.0% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Master-Pack Group Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Master-Pack Group Berhad Efficiently Re-investing Its Profits?
Master-Pack Group Berhad’s three-year median payout ratio to shareholders is 15%, which is quite low. This implies that the company is retaining 85% of its profits. So it looks like Master-Pack Group Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Master-Pack Group 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.
In total, it does look like Master-Pack Group Berhad has some positive aspects to its business. 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. 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 Master-Pack Group 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. 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.
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