Ancom Nylex Berhad’s (KLSE:ANCOMNY) stock is up by a considerable 16% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Ancom Nylex Berhad’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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Ancom Nylex Berhad
How Is ROE Calculated?
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 Ancom Nylex Berhad is:
14% = RM77m ÷ RM541m (Based on the trailing twelve months to August 2023).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Ancom Nylex Berhad’s Earnings Growth And 14% ROE
To begin with, Ancom Nylex Berhad seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 6.4%. Probably as a result of this, Ancom Nylex Berhad was able to see an impressive net income growth of 47% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Ancom Nylex 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 13%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Ancom Nylex Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ancom Nylex Berhad Efficiently Re-investing Its Profits?
Ancom Nylex Berhad’s ‘ three-year median payout ratio is on the lower side at 12% implying that it is retaining a higher percentage (88%) of its profits. So it looks like Ancom Nylex Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Ancom Nylex Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 10%. However, Ancom Nylex Berhad’s ROE is predicted to rise to 18% despite there being no anticipated change in its payout ratio.
Conclusion
On the whole, we feel that Ancom Nylex Berhad’s performance has been quite good. 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 substantial growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
