Yahoo Finance LPI Capital Bhd's (KLSE:LPI) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?
LPI Capital Bhd's (KLSE:LPI) stock is up by 3.6% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to LPI Capital Bhd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for LPI Capital Bhd
How To Calculate Return On Equity?
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 LPI Capital Bhd is:
13% = RM266m ÷ RM2.1b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.13.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
LPI Capital Bhd's Earnings Growth And 13% ROE
To start with, LPI Capital Bhd's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. However, we are curious as to how LPI Capital Bhd's decent returns still resulted in flat growth for LPI Capital Bhd in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared LPI Capital Bhd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.0% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 LPI Capital Bhd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is LPI Capital Bhd Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 86% (implying that the company keeps only 14% of its income) of its business to reinvest into its business), most of LPI Capital Bhd's profits are being paid to shareholders, which explains the absence of growth in earnings.
Additionally, LPI Capital Bhd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 81% of its profits over the next three years. As a result, LPI Capital Bhd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.
Summary
Overall, we feel that LPI Capital Bhd certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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