Gamuda Berhad's (KLSE:GAMUDA) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Gamuda Berhad's (KLSE:GAMUDA) stock increased significantly by 23% 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. Specifically, we decided to study Gamuda Berhad's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Gamuda Berhad

How Do You 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 Gamuda Berhad is:

7.8% = RM914m ÷ RM12b (Based on the trailing twelve months to April 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Gamuda Berhad's Earnings Growth And 7.8% ROE

On the face of it, Gamuda Berhad's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.0%, so we won't completely dismiss the company. Having said that, Gamuda Berhad has shown a modest net income growth of 14% over the past 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 4.8%.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is GAMUDA fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Gamuda Berhad Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 40% (implying that the company retains 60% of its profits), it seems that Gamuda Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Gamuda Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 35%. Regardless, the future ROE for Gamuda Berhad is predicted to rise to 10% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Gamuda Berhad has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.