IJM Corporation Berhad's (KLSE:IJM) Dismal Stock Performance Reflects Weak Fundamentals

It is hard to get excited after looking at IJM Corporation Berhad's (KLSE:IJM) recent performance, when its stock has declined 7.4% over the past month. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on IJM Corporation Berhad's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for IJM Corporation Berhad

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for IJM Corporation Berhad is:

5.9% = RM657m ÷ RM11b (Based on the trailing twelve months to June 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 MYR0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

IJM Corporation Berhad's Earnings Growth And 5.9% ROE

When you first look at it, IJM Corporation Berhad's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.0% either. Accordingly, IJM Corporation Berhad's low net income growth of 2.1% over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared IJM Corporation Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.1% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about IJM Corporation Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is IJM Corporation Berhad Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 85% (or a retention ratio of 15%), most of IJM Corporation Berhad's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, IJM Corporation Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 46% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we would be extremely cautious before making any decision on IJM Corporation Berhad. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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.