With its stock down 2.3% over the past three months, it is easy to disregard AME Elite Consortium Berhad (KLSE:AME). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study AME Elite Consortium Berhad's ROE in this article.
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.
Check out our latest analysis for AME Elite Consortium Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for AME Elite Consortium Berhad is:
9.2% = RM98m ÷ RM1.1b (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.09 in profit.
Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
AME Elite Consortium Berhad's Earnings Growth And 9.2% ROE
At first glance, AME Elite Consortium Berhad's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.0% doesn't go unnoticed by us. Still, AME Elite Consortium Berhad has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay flat.
As a next step, we compared AME Elite Consortium Berhad's performance with the industry and discovered the industry has shrunk at a rate of 2.9% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does offer shareholders some relief
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about AME Elite Consortium Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is AME Elite Consortium Berhad Using Its Retained Earnings Effectively?
In spite of a normal three-year median payout ratio of 31% (or a retention ratio of 69%), AME Elite Consortium Berhad hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, AME Elite Consortium Berhad started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 35%. Accordingly, forecasts suggest that AME Elite Consortium Berhad's future ROE will be 8.1% which is again, similar to the current ROE.
In total, it does look like AME Elite Consortium Berhad has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. 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.
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