It is hard to get excited after looking at ACO Group Berhad's (KLSE:ACO) recent performance, when its stock has declined 17% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study ACO Group Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
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 ACO Group Berhad is:
8.6% = RM7.2m ÷ RM83m (Based on the trailing twelve months to November 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.09 in profit.
Why Is ROE Important For 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.
ACO Group Berhad's Earnings Growth And 8.6% ROE
On the face of it, ACO Group Berhad's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.6% which we definitely can't overlook. However, ACO Group Berhad's five year net income growth was quite low averaging at only 4.2%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.
As a next step, we compared ACO Group Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 3.6% in the same period.
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 ACO Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is ACO Group Berhad Efficiently Re-investing Its Profits?
ACO Group Berhad's low three-year median payout ratio of 24% (or a retention ratio of 76%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Only recently, ACO Group Berhad started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.
In total, it does look like ACO Group Berhad has some positive aspects to its business. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for ACO Group Berhad.
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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.