Do Fundamentals Have Any Role To Play In Driving Datasonic Group Berhad's (KLSE:DSONIC) Stock Up Recently?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Oct 8, 2023, 10:18 PM 4 min read

Most readers would already know that Datasonic Group Berhad's (KLSE:DSONIC) stock increased by 2.2% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Datasonic Group Berhad's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Datasonic Group Berhad

How Is ROE Calculated?

ROE 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 Datasonic Group Berhad is:

23% = RM83m ÷ RM357m (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.23.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Datasonic Group Berhad's Earnings Growth And 23% ROE

To begin with, Datasonic Group Berhad seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 20%. However, we are curious as to how Datasonic Group Berhad's decent returns still resulted in flat growth for Datasonic Group Berhad in the past five years. 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. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 21% over the last few years.

past-earnings-growth — KLSE:DSONIC Past Earnings Growth October 9th 2023

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Datasonic Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Datasonic Group Berhad Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 72% (implying that the company keeps only 28% of its income) of its business to reinvest into its business), most of Datasonic Group Berhad's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Datasonic Group 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 20%.

Summary

Overall, we feel that Datasonic Group Berhad certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. In addition, on studying the latest analyst forecasts, we found that the company's earnings are expected to continue to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.