Gas Malaysia Berhad (KLSE:GASMSIA) has had a rough week with its share price down 2.3%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Gas Malaysia Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Gas Malaysia Berhad
How Do You Calculate Return On Equity?
Return on equity 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 Gas Malaysia Berhad is:
28% = RM330m ÷ RM1.2b (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.28 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Gas Malaysia Berhad's Earnings Growth And 28% ROE
First thing first, we like that Gas Malaysia Berhad has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. Probably as a result of this, Gas Malaysia Berhad was able to see a decent net income growth of 12% over the last five years.
As a next step, we compared Gas Malaysia 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 9.3%.
Earnings growth is an important metric to consider when valuing a stock. 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. What is GASMSIA worth today? The intrinsic value infographic in our free research report helps visualize whether GASMSIA is currently mispriced by the market.
Is Gas Malaysia Berhad Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 90% (or a retention ratio of 9.6%) for Gas Malaysia Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.