Yahoo Finance PETRONAS Gas Berhad's (KLSE:PETGAS) Stock Has Shown A Decent Performance: Have Financials A Role To Play?
Most readers would already know that PETRONAS Gas Berhad's (KLSE:PETGAS) stock increased by 3.9% over the past month. 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. In this article, we decided to focus on PETRONAS Gas Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for PETRONAS Gas 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 PETRONAS Gas Berhad is:
14% = RM1.9b ÷ RM14b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.14.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
PETRONAS Gas Berhad's Earnings Growth And 14% ROE
At first glance, PETRONAS Gas Berhad seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for PETRONAS Gas Berhad in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared PETRONAS Gas Berhad's net income growth with the industry and discovered that the industry saw an average growth of 7.2% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is PETGAS worth today? The intrinsic value infographic in our free research report helps visualize whether PETGAS is currently mispriced by the market.
Is PETRONAS Gas Berhad Using Its Retained Earnings Effectively?
PETRONAS Gas Berhad has a high three-year median payout ratio of 76% (or a retention ratio of 24%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
Additionally, PETRONAS Gas Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 82%. Accordingly, forecasts suggest that PETRONAS Gas Berhad's future ROE will be 14% which is again, similar to the current ROE.
Conclusion
In total, it does look like PETRONAS Gas Berhad has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
