Westports Holdings Berhad's (KLSE:WPRTS) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

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

Tue, Dec 26, 2023, 5:28 PM 4 min read

Most readers would already know that Westports Holdings Berhad's (KLSE:WPRTS) stock increased by 10.0% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Westports Holdings 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.

See our latest analysis for Westports Holdings 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 Westports Holdings Berhad is:

24% = RM808m ÷ RM3.3b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.24 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Westports Holdings Berhad's Earnings Growth And 24% ROE

Firstly, we acknowledge that Westports Holdings Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. Probably as a result of this, Westports Holdings Berhad was able to see a decent net income growth of 7.1% over the last five years.

Next, on comparing Westports Holdings Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.1% over the last few years.

past-earnings-growth — KLSE:WPRTS Past Earnings Growth December 27th 2023

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is WPRTS fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Westports Holdings Berhad Efficiently Re-investing Its Profits?

While Westports Holdings Berhad has a three-year median payout ratio of 68% (which means it retains 32% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Westports Holdings Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 76%. Accordingly, forecasts suggest that Westports Holdings Berhad's future ROE will be 21% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Westports Holdings Berhad's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.