It is hard to get excited after looking at Panasonic Manufacturing Malaysia Berhad’s (KLSE:PANAMY) recent performance, when its stock has declined 9.3% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Panasonic Manufacturing Malaysia Berhad’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Panasonic Manufacturing Malaysia Berhad

How To Calculate Return On Equity?

Return on equity 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 Panasonic Manufacturing Malaysia Berhad is:

11% = RM89m ÷ RM815m (Based on the trailing twelve months to June 2023).

The ‘return’ is the income the business earned over the last year. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.11 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.

Panasonic Manufacturing Malaysia Berhad’s Earnings Growth And 11% ROE

When you first look at it, Panasonic Manufacturing Malaysia Berhad’s ROE doesn’t look that attractive. Although a closer study shows that the company’s ROE is higher than the industry average of 8.8% which we definitely can’t overlook. However, Panasonic Manufacturing Malaysia Berhad’s five year net income decline rate was 9.0%. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to shrink.

Story continues

So, as a next step, we compared Panasonic Manufacturing Malaysia Berhad’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is PANAMY fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Panasonic Manufacturing Malaysia Berhad Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 98% (implying that 2.1% of the profits are retained), most of Panasonic Manufacturing Malaysia Berhad’s profits are being paid to shareholders, which explains the company’s shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Moreover, Panasonic Manufacturing Malaysia 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 78% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

On the whole, Panasonic Manufacturing Malaysia Berhad’s performance is quite a big let-down. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.