Most readers would already know that Sime Darby Berhad’s (KLSE:SIME) stock increased by 2.9% 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. Specifically, we decided to study Sime Darby Berhad’s ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Sime Darby Berhad
How Do You Calculate Return On Equity?
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 Sime Darby Berhad is:
10% = RM1.7b ÷ RM17b (Based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Sime Darby Berhad’s Earnings Growth And 10% ROE
At first glance, Sime Darby Berhad’s ROE doesn’t look very promising. However, given that the company’s ROE is similar to the average industry ROE of 10%, we may spare it some thought. On the other hand, Sime Darby Berhad reported a moderate 11% net income growth 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 instance, the company has a low payout ratio or is being managed efficiently.
Given that the industry shrunk its earnings at a rate of 0.2% over the last few years, the net income growth of the company is quite impressive.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is SIME fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Sime Darby Berhad Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Sime Darby Berhad suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.
Moreover, Sime Darby 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 63%. Regardless, Sime Darby Berhad’s ROE is speculated to decline to 7.9% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we do feel that Sime Darby Berhad has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company’s earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Sime Darby Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
