Does its financial data have a role to play in the recent increase in inventory at AWC Berhad (KLSE: AWC)?
Most readers already know that AWC Berhad (KLSE: AWC) stock has risen significantly by 31% in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of AWC Berhad.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for AWC Berhad
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for AWC Berhad is:
15% = RM39m RM263m (Based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This therefore means that for each MYR1 of its shareholders’ investments, the company generates a profit of MYR0.15.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
AWC Berhad profit growth and 15% ROE
At first glance, AWC Berhad appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 5.0%. As you might expect, the 27% drop in net income reported by AWC Berhad is a bit of a surprise. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
As a next step, we compared the performance of AWC Berhad with the industry and found that the performance of AWC Berhad is depressing even when compared to the industry, which decreased its profits at a rate of 10.0%. during the same period, which is slower than the business.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. If you’re wondering about AWC Berhad’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is AWC Berhad Efficiently Using Its Profits?
When we put together AWC Berhad’s low three-year median payout ratio of 11% (where it keeps 89% of its profits), calculated for the last three-year period, we’re intrigued by the lack of growth. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, AWC Berhad pays dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 27% over the next three years. However, the company’s ROE is not expected to change much despite the expected higher payout ratio.
Overall, we think AWC Berhad certainly has some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, which is hampering its growth. That said, we have looked at the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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