GDB Holdings Berhad's (KLSE:GDB) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Most readers would already know that GDB Holdings Berhad's (KLSE:GDB) stock increased by 7.0% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on GDB Holdings Berhad's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for GDB Holdings Berhad

How Is ROE Calculated?

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 GDB Holdings Berhad is:

19% = RM24m ÷ RM126m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.19 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.

GDB Holdings Berhad's Earnings Growth And 19% ROE

At first glance, GDB Holdings Berhad seems to have a decent ROE. Especially when compared to the industry average of 3.8% the company's ROE looks pretty impressive. This probably laid the ground for GDB Holdings Berhad's significant 20% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Given that the industry shrunk its earnings at a rate of 4.7% in the same period, the net income growth of the company is quite impressive.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about GDB Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GDB Holdings Berhad Using Its Retained Earnings Effectively?

The three-year median payout ratio for GDB Holdings Berhad is 46%, which is moderately low. The company is retaining the remaining 54%. So it seems that GDB Holdings Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

While GDB Holdings Berhad has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 24% over the next three years. As a result, the expected drop in GDB Holdings Berhad's payout ratio explains the anticipated rise in the company's future ROE to 29%, over the same period.

Summary

Overall, we are quite pleased with GDB Holdings Berhad's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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