Nestlé (Malaysia) Berhad's (KLSE:NESTLE) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Most readers would already be aware that Nestlé (Malaysia) Berhad's (KLSE:NESTLE) stock increased significantly by 21% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Nestlé (Malaysia) 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Nestlé (Malaysia) Berhad is:
72% = RM429m ÷ RM594m (Based on the trailing twelve months to September 2025).
The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.72 in profit.
View our latest analysis for Nestlé (Malaysia) Berhad
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. 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.
Nestlé (Malaysia) Berhad's Earnings Growth And 72% ROE
To begin with, Nestlé (Malaysia) Berhad has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.2% the company's ROE is quite impressive. Needless to say, we are quite surprised to see that Nestlé (Malaysia) Berhad's net income shrunk at a rate of 4.6% over the past five years. We reckon that there could be some other factors at play here that are preventing 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 Nestlé (Malaysia) 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 7.5% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Nestlé (Malaysia) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Nestlé (Malaysia) Berhad Making Efficient Use Of Its Profits?
Nestlé (Malaysia) Berhad has a high three-year median payout ratio of 100% (that is, it is retaining -0.3% 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.
In addition, Nestlé (Malaysia) Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 99% of its profits over the next three years. However, Nestlé (Malaysia) Berhad's ROE is predicted to rise to 110% despite there being no anticipated change in its payout ratio.
Summary
In total, we're a bit ambivalent about Nestlé (Malaysia) Berhad's performance. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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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.