Malaysia Smelting Corporation Berhad's (KLSE:MSC) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Simply Wall St
4 min read
Malaysia Smelting Corporation Berhad's (KLSE:MSC) stock is up by a considerable 14% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Malaysia Smelting Corporation Berhad's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Malaysia Smelting Corporation Berhad is:
9.2% = RM75m ÷ RM816m (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.09 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Malaysia Smelting Corporation Berhad's Earnings Growth And 9.2% ROE
At first glance, Malaysia Smelting Corporation Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.2%, is definitely interesting. Even more so after seeing Malaysia Smelting Corporation Berhad's exceptional 44% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.
As a next step, we compared Malaysia Smelting 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 27%.
KLSE:MSC Past Earnings Growth July 14th 2023
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Malaysia Smelting Corporation Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Malaysia Smelting Corporation Berhad Using Its Retained Earnings Effectively?
Malaysia Smelting Corporation Berhad has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it looks like Malaysia Smelting Corporation Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Malaysia Smelting Corporation Berhad has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 22%. However, Malaysia Smelting Corporation Berhad's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.
Conclusion
On the whole, we feel that Malaysia Smelting Corporation Berhad's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 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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