L&P Global Berhad (KLSE:L&PBHD) shares fall but fundamentals look good: is the market wrong?

L&P Global Berhad (KLSE:L&PBHD) has had a tough month, with its share price down 18%. But if you look closely, you might conclude that its strong financials could mean the stock has the potential to rise in the long term, given how markets typically reward companies with good financial health. Today, we’ll be looking specifically at L&P Global Berhad’s ROE.

Return on Equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In simple terms, it measures the profitability of a company relative to the shareholder’s equity.

See our latest analysis for L&P Global Berhad

How is ROE calculated?

This return on equity formula Is:

Return on Equity = Net Profit (from continuing operations) ÷ Equity

Therefore, based on the above formula, the ROE for L&P Global Berhad is:

21% = RM21 million ÷ RM101 million (Based on the trailing twelve months to March 2024).

The ‘return’ refers to the company’s earnings over the last year. This means that for every MYR1 in shareholders’ capital, the company generated MYR0.21 in profit.

What is the relationship between ROE and profit growth?

So far, we have learned that ROE measures how effectively a company generates its profits. Depending on how much of those profits a company reinvests or “retains” and how effectively it does so, we are able to assess the company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that do not necessarily have these characteristics.

L&P Global Berhad Earnings Growth and 21% ROE Comparison

At first glance, L&P Global Berhad seems to have a decent ROE. Compared to the industry average ROE of 7.9%, the company’s ROE looks quite impressive. This certainly adds context to L&P Global Berhad’s exceptional 25% net income growth over the past five years. However, there could be other reasons for this growth as well. Such as – high profit retention or effective management.

The story continues

Next, when comparing the net income growth with the industry, we found that L&P Global Berhad’s growth is quite high when compared to the industry average growth of 14% during the same period, which is a great result.

Earnings growth is an important metric to consider when valuing a stock. An investor should try to determine whether the expected growth or decline in earnings, as the case may be, is priced into the stock. This helps them determine whether the stock is destined for a bright or bleak future. If you are wondering about the valuation of L&P Global Berhad, check out this indicator of the price-to-earnings ratio compared to the industry.

Is L&P Global Berhad effectively reinvesting its profits?

L&P Global Berhad has a really low three-year median payout ratio of 19%, which means it has the remaining 81% to reinvest in its business. So it looks like L&P Global Berhad is reinvesting profits to a significant extent to grow its business, which is evident from the earnings growth.

Although L&P Global Berhad’s profits have been growing, the company has only recently started paying dividends, which likely means the company has decided to impress new and existing shareholders with a dividend payout.

summary

Overall, we are very pleased with L&P Global Berhad’s performance. In particular, we like that the company is reinvesting a significant portion of its profits at a high rate of return. This has obviously resulted in the company seeing significant earnings growth. If the company continues to grow its profits in the way it has, this could have a positive impact on the share price, given how earnings per share affect long-term share prices. Let’s not forget that share price performance is also affected by the potential risks the company may face. Therefore, it is important for investors to be aware of the risks associated with the business. You can see the 2 risks we have identified for L&P Global Berhad by visiting our Risk Table for free on our platform here.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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