Bermaz Auto Berhad's (KLSE:BAUTO) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Bermaz Auto Berhad's (KLSE:BAUTO) stock up by 5.9% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Bermaz Auto Berhad's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Bermaz Auto Berhad

How Is ROE Calculated?

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 Bermaz Auto Berhad is:

20% = RM104m ÷ RM521m (Based on the trailing twelve months to April 2020).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.20 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Bermaz Auto Berhad's Earnings Growth And 20% ROE

At first glance, Bermaz Auto Berhad seems to have a decent ROE. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. Despite this, Bermaz Auto Berhad's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Bermaz Auto 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 4.1% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Bermaz Auto Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Bermaz Auto Berhad Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 77% (implying that the company keeps only 23% of its income) of its business to reinvest into its business), most of Bermaz Auto Berhad's profits are being paid to shareholders, which explains the absence of growth in earnings.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 57% over the next three years. The fact that the company's ROE is expected to rise to 27% over the same period is explained by the drop in the payout ratio.

Summary

On the whole, we do feel that Bermaz Auto Berhad has some positive attributes. 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, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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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