Yahoo Finance Malaysia Smelting Corporation Berhad's (KLSE:MSC) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
With its stock down 22% over the past month, it is easy to disregard Malaysia Smelting Corporation Berhad (KLSE:MSC). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Malaysia Smelting Corporation Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Malaysia Smelting Corporation Berhad
How To Calculate Return On Equity?
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 Malaysia Smelting Corporation Berhad is:
9.5% = RM79m ÷ RM838m (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.09 in profit.
What Is The Relationship Between ROE And 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 Malaysia Smelting Corporation Berhad's Earnings Growth And 9.5% ROE
On the face of it, Malaysia Smelting Corporation Berhad's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.5%, is definitely interesting. Even more so after seeing Malaysia Smelting Corporation Berhad's exceptional 25% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.
As a next step, we compared Malaysia Smelting Corporation 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 19%.
Earnings growth is a huge factor in stock valuation. 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 Malaysia Smelting Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Malaysia Smelting Corporation Berhad Using Its Retained Earnings Effectively?
Malaysia Smelting Corporation Berhad has a really low three-year median payout ratio of 25%, meaning that it has the remaining 75% left over to reinvest into its business. So it looks like Malaysia Smelting Corporation Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Malaysia Smelting Corporation Berhad has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 30% over the next three years. However, Malaysia Smelting Corporation Berhad's future ROE is expected to rise to 14% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.
Conclusion
Overall, we are quite pleased with Malaysia Smelting Corporation Berhad's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
