Will Weakness in KPJ Healthcare Berhad's (KLSE:KPJ) Stock Prove Temporary Given Strong Fundamentals?

Yahoo

03-07-2025

It is hard to get excited after looking at KPJ Healthcare Berhad's (KLSE:KPJ) recent performance, when its stock has declined 4.8% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on KPJ Healthcare Berhad's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
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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 KPJ Healthcare Berhad is:
13% = RM370m ÷ RM2.8b (Based on the trailing twelve months to March 2025).
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 MYR0.13.
Check out our latest analysis for KPJ Healthcare Berhad
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.
To start with, KPJ Healthcare Berhad's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.2%. This probably laid the ground for KPJ Healthcare Berhad's significant 25% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared KPJ Healthcare Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is KPJ worth today? The intrinsic value infographic in our free research report helps visualize whether KPJ is currently mispriced by the market.
The high three-year median payout ratio of 51% (implying that it keeps only 49% of profits) for KPJ Healthcare Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, KPJ Healthcare Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 51%. Accordingly, forecasts suggest that KPJ Healthcare Berhad's future ROE will be 15% which is again, similar to the current ROE.
Overall, we are quite pleased with KPJ Healthcare Berhad's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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