Yahoo Finance Aeon Co. (M) Bhd.'s (KLSE:AEON) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Aeon (M) Bhd's (KLSE:AEON) stock is up by 9.0% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on Aeon (M) Bhd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Aeon (M) Bhd
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 Aeon (M) Bhd is:
6.2% = RM115m ÷ RM1.9b (Based on the trailing twelve months to December 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 MYR0.06 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Aeon (M) Bhd's Earnings Growth And 6.2% ROE
When you first look at it, Aeon (M) Bhd's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.1%, the company's ROE leaves us feeling even less enthusiastic. As a result, Aeon (M) Bhd reported a very low income growth of 4.5% over the past five years.
We then compared Aeon (M) Bhd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AEON fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Aeon (M) Bhd Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 49% (implying that the company retains the remaining 51% of its income), Aeon (M) Bhd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Aeon (M) Bhd 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 47% of its profits over the next three years. Still, forecasts suggest that Aeon (M) Bhd's future ROE will rise to 7.8% even though the the company's payout ratio is not expected to change by much.
Summary
On the whole, we feel that the performance shown by Aeon (M) Bhd can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
