Boilermech Holdings Berhad's (KLSE:BOILERM) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Most readers would already be aware that Boilermech Holdings Berhad's (KLSE:BOILERM) stock increased significantly by 36% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Boilermech Holdings Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Boilermech Holdings Berhad

How To Calculate Return On Equity?

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 Boilermech Holdings Berhad is:

9.7% = RM22m ÷ RM227m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.10 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Boilermech Holdings Berhad's Earnings Growth And 9.7% ROE

At first glance, Boilermech Holdings Berhad's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.4%. Having said that, Boilermech Holdings Berhad's five year net income decline rate was 6.1%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Boilermech Holdings Berhad's performance with the industry and found thatBoilermech Holdings Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.2% in the same period, which is a slower than the company.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Boilermech Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Boilermech Holdings Berhad Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 39% (or a retention ratio of 61%) which is pretty normal, Boilermech Holdings Berhad's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Boilermech Holdings Berhad has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 46%. Accordingly, forecasts suggest that Boilermech Holdings Berhad's future ROE will be 11% which is again, similar to the current ROE.

Summary

On the whole, we feel that the performance shown by Boilermech Holdings Berhad can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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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