BP Plastics Holding Bhd.'s (KLSE:BPPLAS) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

BP Plastics Holding Bhd (KLSE:BPPLAS) has had a rough month with its share price down 1.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on BP Plastics Holding Bhd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for BP Plastics Holding Bhd

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for BP Plastics Holding Bhd is:

12% = RM31m ÷ RM262m (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of BP Plastics Holding Bhd's Earnings Growth And 12% ROE

At first glance, BP Plastics Holding Bhd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.5%. This certainly adds some context to BP Plastics Holding Bhd's decent 12% net income growth seen over the past five years.

As a next step, we compared BP Plastics Holding Bhd'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 14% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is BPPLAS worth today? The intrinsic value infographic in our free research report helps visualize whether BPPLAS is currently mispriced by the market.

Is BP Plastics Holding Bhd Using Its Retained Earnings Effectively?

BP Plastics Holding Bhd has a healthy combination of a moderate three-year median payout ratio of 45% (or a retention ratio of 55%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, BP Plastics Holding Bhd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 43% of its profits over the next three years. Still, forecasts suggest that BP Plastics Holding Bhd's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with BP Plastics Holding Bhd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.