Can Amway (Malaysia) Holdings Berhad's (KLSE:AMWAY) Decent Financials Help Push Its Stock Prices Higher?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Sep 24, 2023, 10:57 PM 4 min read

Amway (Malaysia) Holdings Berhad's (KLSE:AMWAY) stock was mostly flat over the past three months. However, the company's key financials probably have more to say so you may want to give the company a closer look given that stock prices usually follow the long-term financial performance of a business. Specifically, we decided to study Amway (Malaysia) Holdings Berhad's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Amway (Malaysia) Holdings Berhad

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Amway (Malaysia) Holdings Berhad is:

32% = RM79m ÷ RM245m (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.32 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Amway (Malaysia) Holdings Berhad's Earnings Growth And 32% ROE

Firstly, we acknowledge that Amway (Malaysia) Holdings Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Despite this, Amway (Malaysia) Holdings Berhad's five year net income growth was quite low averaging at only 4.1%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

As a next step, we compared Amway (Malaysia) Holdings Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.

past-earnings-growth — KLSE:AMWAY Past Earnings Growth September 25th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Amway (Malaysia) Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Amway (Malaysia) Holdings Berhad Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 67% (or a retention ratio of 33%), most of Amway (Malaysia) Holdings Berhad's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Amway (Malaysia) Holdings Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 80% of its profits over the next three years.

Summary

In total, it does look like Amway (Malaysia) Holdings Berhad has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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 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.