In This Article:
Most readers would already know that Ajinomoto (Malaysia) Berhad's (KLSE:AJI) stock increased by 4.1% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Ajinomoto (Malaysia) Berhad's ROE in this article.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Ajinomoto (Malaysia) Berhad
How Do You Calculate Return On Equity?
ROE 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 Ajinomoto (Malaysia) Berhad is:
8.8% = RM48m ÷ RM546m (Based on the trailing twelve months to September 2023).
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.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Ajinomoto (Malaysia) Berhad's Earnings Growth And 8.8% ROE
At first glance, Ajinomoto (Malaysia) Berhad's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.8% which we definitely can't overlook. But seeing Ajinomoto (Malaysia) Berhad's five year net income decline of 23% over the past five years, we might rethink that. 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 shrink.
So, as a next step, we compared Ajinomoto (Malaysia) Berhad's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 24% over the last few years.