Panda Eco System Berhad (KLSE:PANDA) has had a rough month with its share price down 5.6%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Panda Eco System Berhad’s ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Panda Eco System Berhad
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Panda Eco System Berhad is:
14% = RM5.5m ÷ RM38m (Based on the trailing twelve months to September 2024).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.14 in profit.
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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
At first glance, Panda Eco System Berhad seems to have a decent ROE. Especially when compared to the industry average of 10.0% the company’s ROE looks pretty impressive. As you might expect, the 6.2% net income decline reported by Panda Eco System Berhad is a bit of a surprise. 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. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
So, as a next step, we compared Panda Eco System 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 14% over the last few years.