Is Allianz Malaysia Berhad's (KLSE:ALLIANZ) Recent Stock Performance Tethered To Its Strong Fundamentals?
Allianz Malaysia Berhad's (KLSE:ALLIANZ) stock is up by a considerable 17% over the past month. 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 Allianz Malaysia Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Allianz Malaysia Berhad
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 Allianz Malaysia Berhad is:
14% = RM731m ÷ RM5.1b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.14 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
A Side By Side comparison of Allianz Malaysia Berhad's Earnings Growth And 14% ROE
At first glance, Allianz Malaysia Berhad seems to have a decent ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. Despite the modest returns, Allianz Malaysia Berhad's five year net income growth was quite low, averaging at only 4.6%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then performed a comparison between Allianz Malaysia Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.6% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Allianz Malaysia Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Allianz Malaysia Berhad Efficiently Re-investing Its Profits?
Despite having a moderate three-year median payout ratio of 32% (implying that the company retains the remaining 68% of its income), Allianz Malaysia Berhad's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Allianz Malaysia Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 44% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Summary
In total, we are pretty happy with Allianz Malaysia Berhad's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.