Is Weakness In PGF Capital Berhad (KLSE:PGF) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 7.2% over the past three months, it is easy to disregard PGF Capital Berhad (KLSE:PGF). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study PGF Capital 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for PGF Capital 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 PGF Capital Berhad is:

5.7% = RM13m ÷ RM232m (Based on the trailing twelve months to May 2024).

The ‘return’ is the income the business earned over the last year. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.06 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.

PGF Capital Berhad’s Earnings Growth And 5.7% ROE

On the face of it, PGF Capital Berhad’s ROE is not much to talk about. However, the fact that the company’s ROE is higher than the average industry ROE of 4.3%, is definitely interesting. Particularly, the substantial 30% net income growth seen by PGF Capital 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. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

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As a next step, we compared PGF Capital 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 33% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is PGF Capital Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PGF Capital Berhad Efficiently Re-investing Its Profits?

PGF Capital Berhad has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, PGF Capital Berhad has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with PGF Capital 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for PGF Capital Berhad.

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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.