It is hard to get excited after looking at AME Elite Consortium Berhad's (KLSE:AME) recent performance, when its stock has declined 3.6% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on AME Elite Consortium Berhad's ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for AME Elite Consortium Berhad
How Is ROE Calculated?
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 AME Elite Consortium Berhad is:
13% = RM144m ÷ RM1.1b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.13.
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. 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.
AME Elite Consortium Berhad's Earnings Growth And 13% ROE
To begin with, AME Elite Consortium Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 4.1%. This probably laid the ground for AME Elite Consortium Berhad's moderate 6.1% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 4.9% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is AME Elite Consortium Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is AME Elite Consortium Berhad Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that AME Elite Consortium Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.