Is Nanofilm Technologies International Limited's (SGX:MZH) Recent Performance Underpinned By Weak Financials?

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

Thu, Mar 20, 2025, 4:52 PM 4 min read

Nanofilm Technologies International (SGX:MZH) has had a rough month with its share price down 9.5%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Nanofilm Technologies International'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.

See our latest analysis for Nanofilm Technologies International

How Do You 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 Nanofilm Technologies International is:

1.8% = S$7.5m ÷ S$430m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.02.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of Nanofilm Technologies International's Earnings Growth And 1.8% ROE

As you can see, Nanofilm Technologies International's ROE looks pretty weak. Not just that, even compared to the industry average of 3.5%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 29% seen by Nanofilm Technologies International was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 5.7% in the same 5-year period, we still found Nanofilm Technologies International's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth — SGX:MZH Past Earnings Growth March 20th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is MZH worth today? The intrinsic value infographic in our free research report helps visualize whether MZH is currently mispriced by the market.

Is Nanofilm Technologies International Efficiently Re-investing Its Profits?

Nanofilm Technologies International has a high three-year median payout ratio of 54% (that is, it is retaining 46% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely.

Additionally, Nanofilm Technologies International has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 37% over the next three years. The fact that the company's ROE is expected to rise to 6.2% over the same period is explained by the drop in the payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Nanofilm Technologies International. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.