Gamuda Berhad's (KLSE:GAMUDA) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Gamuda Berhad (KLSE:GAMUDA) has had a rough three months with its share price down 11%. 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 Gamuda Berhad's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

We've discovered 1 warning sign about Gamuda Berhad. View them for free.

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 Gamuda Berhad is:

8.0% = RM974m ÷ RM12b (Based on the trailing twelve months to January 2025).

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 MYR0.08 in profit.

View our latest analysis for Gamuda Berhad

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. 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.

Gamuda Berhad's Earnings Growth And 8.0% ROE

On the face of it, Gamuda Berhad's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.5%. Moreover, we are quite pleased to see that Gamuda Berhad's net income grew significantly at a rate of 21% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Gamuda 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 15%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Gamuda Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gamuda Berhad Using Its Retained Earnings Effectively?

Gamuda Berhad's three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. By the looks of it, the dividend is well covered and Gamuda Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Gamuda Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 42% of its profits over the next three years. Still, forecasts suggest that Gamuda Berhad's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Gamuda Berhad certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.