Could the market be wrong about Malaysian Pacific Industries Berhad (KLSE:MPI) given its attractive financial outlook?

It’s hard to get excited after looking at the recent performance of Malaysian Pacific Industries Berhad (KLSE:MPI), as its stock is down 19% in the past three months. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we have decided to focus on the ROE of Malaysian Pacific Industries Berhad.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

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How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Malaysian Pacific Industries Berhad is:

17% = RM385m ÷ RM2.3b (Based on trailing twelve months to June 2022).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every MYR 1 worth of equity, the company was able to make a profit of MYR 0.17.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Malaysian Pacific Industries Berhad earnings growth and 17% ROE

For starters, Malaysian Pacific Industries Berhad’s ROE looks acceptable. Additionally, the company’s ROE is similar to the industry average of 14%. This certainly adds some context to Malaysian Pacific Industries Berhad’s moderate 18% net income growth over the past five years.

In a next step, we benchmarked Malaysian Pacific Industries Berhad’s net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 12% .

KLSE: MPI Past Earnings Growth October 26, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. What is MPI worth today? The intrinsic value infographic in our free research report helps visualize whether MPI is currently being mispriced by the market.

Does Malaysian Pacific Industries Berhad use its profits efficiently?

Malaysian Pacific Industries Berhad has a healthy combination of a moderate three-year median payout ratio of 27% (or a retention rate of 73%) and respectable earnings growth, as seen above , which means that the company was efficient in the use of its profits.

Additionally, Malaysian Pacific Industries Berhad is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 19% over the next three years. Either way, ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

Overall, we believe the performance of Malaysian Pacific Industries Berhad has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if Malaysian Pacific Industries Berhad is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

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