Kejuruteraan Asastera Berhad's (KLSE:KAB) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Kejuruteraanstera Berhad's (KLSE:KAB) stock is up by a considerable 7.0% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Kejuruteraanstera Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Kejuruteraanstera Berhad

How Is ROE Calculated?

Return on equity 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 Kejuruteraanstera Berhad is:

8.8% = RM6.3m ÷ RM72m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.09 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. 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.

Kejuruteraanstera Berhad's Earnings Growth And 8.8% ROE

When you first look at it, Kejuruteraanstera Berhad's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 4.7%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 8.3% seen over the past five years by Kejuruteraanstera Berhad. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Kejuruteraanstera Berhad compares quite favourably to the industry average, which shows a decline of 4.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Kejuruteraanstera Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kejuruteraanstera Berhad Making Efficient Use Of Its Profits?

Kejuruteraanstera Berhad has a healthy combination of a moderate three-year median payout ratio of 37% (or a retention ratio of 63%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Kejuruteraanstera Berhad has paid dividends over a period of three 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 38%. However, Kejuruteraanstera Berhad's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Kejuruteraanstera Berhad's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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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