Westports Holdings Berhad (KLSE:WPRTS) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Westports Holdings Berhad’s ROE today.
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 Westports Holdings Berhad
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Westports Holdings Berhad is:
23% = RM800m ÷ RM3.4b (Based on the trailing twelve months to March 2024).
The ‘return’ is the yearly profit. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.23.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Westports Holdings Berhad’s Earnings Growth And 23% ROE
To begin with, Westports Holdings Berhad seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 7.9%. This probably laid the ground for Westports Holdings Berhad’s moderate 6.8% net income growth seen over the past five years.
As a next step, we compared Westports Holdings Berhad’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.5% in the same period.
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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Westports Holdings Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Westports Holdings Berhad Efficiently Re-investing Its Profits?
Westports Holdings Berhad has a significant three-year median payout ratio of 70%, meaning that it is left with only 30% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Besides, Westports Holdings Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 73%. As a result, Westports Holdings Berhad’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 22% for future ROE.
Summary
Overall, we are quite pleased with Westports Holdings Berhad’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
