Dutch Lady Milk Industries Berhad’s (KLSE:DLADY) stock is up by 1.3% over the past week. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company’s financials don’t look very promising. Particularly, we will be paying attention to Dutch Lady Milk Industries Berhad’s ROE today.
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 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 Dutch Lady Milk Industries Berhad
How Is ROE Calculated?
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 Dutch Lady Milk Industries Berhad is:
6.8% = RM29m ÷ RM430m (Based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.07 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. 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.
Dutch Lady Milk Industries Berhad’s Earnings Growth And 6.8% ROE
At first glance, Dutch Lady Milk Industries Berhad’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 6.9%, so we won’t completely dismiss the company. However, Dutch Lady Milk Industries Berhad has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company’s ROE is not particularly great to begin with. So that could also be one of the reasons behind the company’s flat growth in earnings.
Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 24% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Dutch Lady Milk Industries Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Dutch Lady Milk Industries Berhad Using Its Retained Earnings Effectively?
Dutch Lady Milk Industries Berhad has a high three-year median payout ratio of 62% (or a retention ratio of 38%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there’s been no growth in its earnings.
Moreover, Dutch Lady Milk Industries 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.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Dutch Lady Milk Industries Berhad. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.
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