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Does finance have a role to play?
Able Global Berhad (KLSE:ABLEGLOB) has had a great run on the stock market, with its shares rising a significant 33% in the last three months. We wonder if and what role the company’s financials play in this price change, since a company’s long-term fundamentals typically dictate market outcomes. Specifically, we decided to study Able Global Berhad’s ROE in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
Check out our latest analysis for Able Global Berhad
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Able Global Berhad’s ROE is:
12% = RM52 million ÷ RM443 million (Based on trailing twelve months to December 2023).
The ‘return’ is the annual profit. One way to conceptualize this is that for every MYR1 of share capital it has, the company made MYR0.12 in profit.
What does ROE have to do with earnings growth?
So far, we’ve learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Able Global Berhad’s earnings growth and 12% ROE
At first glance, Able Global Berhad appears to have a decent ROE. Compared to the industry average ROE of 7.5%, the company’s ROE looks quite remarkable. For this reason, Able Global Berhad’s five-year net income decline of 2.7% raises the question of why the high ROE has not translated into earnings growth. We think there may be other factors at play here that are holding back the company’s growth. These include low profit retention or poor capital allocation.
That being said, we compared Able Global Berhad’s performance to the industry and were concerned when we discovered that although the company decreased its profits, the industry grew its profits at a rate of 25% over the same 5-year period.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea of whether the stock is headed for clear blue waters or if swampy waters await. A good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So you might want check if Able Global Berhad is trading on a high or low P/Ein relation to your sector.
The story continues
Is Able Global Berhad using its retained earnings effectively?
Despite a typical three-year average payout ratio of 40% (i.e. a 60% retention ratio), the fact that Able Global Berhad’s profits have declined is quite puzzling. It seems that there may be other reasons to explain the lack in this regard. For example, the business may be in decline.
Furthermore, Able Global Berhad has been paying dividends for at least ten years or more, suggesting that management must have realized that shareholders prefer dividends to earnings growth. By studying the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 36% of its earnings over the next three years. As a result, Able Global Berhad’s ROE is also not expected to change much, which we infer from the analysts’ estimate of 11% for future ROE.
Conclusion
Altogether, it appears that Able Global Berhad has some positive aspects to its business. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe there may be some external factors that may be having a negative impact on the business. As such, the latest forecasts from industry analysts show that analysts expect to see a huge improvement in the company’s earnings growth rate. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.