Most readers would already know that the Sime Darby Plantation Berhad (KLSE:SIMEPLT) share price has increased by 1.4% over the last month. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In this article, we have 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 receives from its shareholders. In other words, ROE shows the return that each dollar of a shareholder's investment generates.
Check out our latest analysis for Sime Darby Plantation Berhad.
How is ROE calculated?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Sime Darby Plantation Berhad's ROE is:
9.4% = RM1.9b ÷ RM20b (Based on trailing 12 months to December 2023).
“Return” is the profit over the past 12 months. Another way to think of it is that for every RM1 worth of shares, the company was able to earn him RM0.09 in profit.
What is the relationship between ROE and profit growth rate?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Depending on how much of these profits a 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 constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
A side-by-side comparison of Sime Darby Plantation Berhad's earnings growth and ROE of 9.4%.
At first glance, Sime Darby Plantation Berhad's ROE does not look very promising. However, upon closer inspection, we find that the company's ROE is higher than the industry average of his 7.4%, which is hard to miss. Particularly impressive is the impressive 27% increase in net profit that Sime Darby Plantation Berhad has shown over the past five years. Having said that, the company's ROE is slightly lower to begin with, just higher than the industry average. Therefore, there may be other reasons for the increase in revenue. Companies with high profit retention rates and companies in high-growth industries.
We then compared Sime Darby Plantation Berhad's net income growth rate with the industry and found that the growth rate reported by the company is on par with the industry average growth rate of 25% over the past few years.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. Is Sime Darby Plantation Berhad valued significantly compared to other companies? These 3 valuation metrics can help you decide.
Is Sime Darby Plantation Berhad using its profits efficiently?
Sime Darby Plantation Berhad's median three-year dividend payout ratio is 50% (assuming it retains 50% of its earnings), which is neither too low nor too high. It seems, therefore, that Sime Darby Plantation Berhad has delivered impressive growth in earnings (as mentioned above) and reinvested them efficiently in a way that pays a well-covered dividend.
Furthermore, Sime Darby Plantation Berhad is determined to continue sharing its profits with its shareholders, as can be inferred from its long history of paying dividends over 6 years. Based on the latest analyst forecasts, the company's future dividend payout ratio over the next three years is expected to remain stable at 54%. As a result, Sime Darby Plantation Berhad's ROE is also not expected to change significantly, which is inferred from analysts' future ROE expectations of 7.9%.
conclusion
Overall, we're pretty satisfied with Sime Darby Plantation Berhad's performance. Specifically, we like that the company is reinvesting high profits at a moderate rate of return, and as a result, profits are expanding. Having said that, we looked at current analyst forecasts and found that while the company has grown earnings in the past, we are concerned that analysts expect earnings to shrink in the future. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
