TPC Plus Berhad (KLSE:TPC) share price is down 4.6%, having had a rough three months. However, the company’s fundamentals are very good, and long-term financials are often in line with future market price movements. In particular, today we pay attention to TPC Plus Berhad’s ROE.
Return on equity or ROE is a key metric used to assess how efficiently a company’s management is using the company’s capital. In short, ROE shows the return each dollar generates relative to shareholders’ investments.
Check out our latest analysis of TPC Plus Berhad
How is ROE calculated?
Return to equity can be calculated using the formula:
Return on equity = net profit (from continuing operations) ÷ stockholders’ equity
Therefore, based on the above formula, the ROE for TPC Plus Berhad is:
20% = RM17m ÷ RM83m (based on twelve months to June 2023).
‘Return’ refers to the company’s earnings in the previous year. Therefore, this means that for every MYR1 of shareholder’s investments, the company earns MYR0.20 in profit.
Why is ROE important to earnings growth?
So far, we have learned that ROE is a measure of a company’s profitability. We can assess a company’s ability to generate future profits based on how much of its profits it chooses to reinvest or “retain”. If we assume that everything else remains unchanged, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that do not carry these characteristics.
TPC Plus Berhad’s revenue growth and 20% ROE
To begin with, TPC Plus Berhad’s ROE looks acceptable. The company’s ROE looks impressive, especially when compared to the industry average of 7.6%. Needless to say, we were surprised to see TPC Plus Berhad’s net income decline by 3.3% over the past five years. Based on this, we feel that there may be other factors that may hinder the company’s growth that have not been discussed in this paper. For example, the company may have a high payout ratio or its business may be poor in terms of capital allocation, for example.
So, in the next step, comparing TPC Plus Berhad with the industry, we are disappointed to find that the industry has been growing by 23% in the last few years while the company is declining in revenue.
Earnings growth is an important metric to consider when evaluating a stock. Investors must next decide whether the expected earnings growth or lack thereof is built into the stock price. By doing this, they will have an idea if the stock has entered the clear blue water or the marshy waters are waiting. 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 earnings expectations. Therefore, you may want to check whether TPC Plus Berhad is trading at a high P/E or a low P/E relative to the industry.
Is TPC Plus Berhad effectively reinvesting its profits?
TPC Plus Berhad does not pay any dividends, which probably means that all of its profits are being reinvested into the business, which does not explain why the company’s profits have declined. So there may be other factors at play here that can hinder growth. For example, the business experienced some headwinds.
Overall, we feel that TPC Plus Berhad definitely has some positives to consider. Despite the high ROE and high reinvestment rate, we were disappointed to see the lack of growth in earnings. We believe there may be some external factors that could adversely affect the business. While we don’t dismiss the company entirely, what we do is try to determine how risky the business is in order to make informed decisions around the company. You can see the 2 risks we have identified for TPC Plus Berhad by visiting our Accidents dashboard Here on our platform for free.
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