Frontken Corporation Berhad (KLSE:FRONTKN) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Frontken Corporation Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Frontken Corporation 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 Frontken Corporation Berhad is:

24% = RM134m ÷ RM556m (Based on the trailing twelve months to September 2022).

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 MYR0.24 in profit.

What Has ROE Got To Do With 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Frontken Corporation Berhad's Earnings Growth And 24% ROE

To begin with, Frontken Corporation Berhad has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. As a result, Frontken Corporation Berhad's exceptional 25% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Frontken Corporation 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 3.3%.

Earnings growth is an important metric to consider when valuing a stock. 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. One 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 may want to check if Frontken Corporation Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Frontken Corporation Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 51% (implying that it keeps only 49% of profits) for Frontken Corporation Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Frontken Corporation Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 44%. However, Frontken Corporation Berhad's ROE is predicted to rise to 33% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Frontken Corporation Berhad's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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