Most readers would already know that Sime Darby Plantation Berhad’s (KLSE:SIMEPLT) stock increased by 1.4% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Sime Darby Plantation Berhad’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Sime Darby Plantation Berhad
How Is ROE Calculated?
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 Plantation Berhad is:
9.4% = RM1.9b ÷ RM20b (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.
What Is The Relationship Between ROE And 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 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 Sime Darby Plantation Berhad’s Earnings Growth And 9.4% ROE
At first glance, Sime Darby Plantation Berhad’s ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 7.4% which we definitely can’t overlook. Particularly, the substantial 27% net income growth seen by Sime Darby Plantation Berhad over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing Sime Darby Plantation Berhad’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 25% over the last few years.
Earnings growth is a huge factor in stock valuation. 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. Is Sime Darby Plantation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sime Darby Plantation Berhad Making Efficient Use Of Its Profits?
Sime Darby Plantation Berhad has a three-year median payout ratio of 50% (where it is retaining 50% of its income) which is not too low or not too high. So it seems that Sime Darby Plantation Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Moreover, Sime Darby Plantation Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. 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 54%. As a result, Sime Darby Plantation Berhad’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 7.9% for future ROE.
Conclusion
In total, we are pretty happy with Sime Darby Plantation Berhad’s performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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.
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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.
