Yahoo Finance Does Panasonic Manufacturing Malaysia Berhad's (KLSE:PANAMY) Weak Fundamentals Mean That The Market Could Correct Its Share Price?
Most readers would already be aware that Panasonic Manufacturing Malaysia Berhad's (KLSE:PANAMY) stock increased significantly by 6.8% over the past month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Panasonic Manufacturing Malaysia Berhad's ROE in this article.
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.
Check out our latest analysis for Panasonic Manufacturing Malaysia Berhad
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Panasonic Manufacturing Malaysia Berhad is:
10% = RM82m ÷ RM805m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.10 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Panasonic Manufacturing Malaysia Berhad's Earnings Growth And 10% ROE
When you first look at it, Panasonic Manufacturing Malaysia Berhad's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 8.5%, is definitely interesting. But seeing Panasonic Manufacturing Malaysia Berhad's five year net income decline of 8.1% over the past five years, we might rethink that. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.
So, as a next step, we compared Panasonic Manufacturing Malaysia Berhad's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.8% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is PANAMY worth today? The intrinsic value infographic in our free research report helps visualize whether PANAMY is currently mispriced by the market.
Is Panasonic Manufacturing Malaysia Berhad Using Its Retained Earnings Effectively?
Panasonic Manufacturing Malaysia Berhad has a high three-year median payout ratio of 92% (that is, it is retaining 7.5% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely.
Moreover, Panasonic Manufacturing Malaysia Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 75% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.
Summary
Overall, we would be extremely cautious before making any decision on Panasonic Manufacturing Malaysia Berhad. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
