UMS-Neiken Group Berhad (KLSE:UMSNGB) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Most readers would already be aware that UMS-Neiken Group Berhad's (KLSE:UMSNGB) stock increased significantly by 49% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on UMS-Neiken Group Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for UMS-Neiken Group Berhad

How To Calculate Return On Equity?

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 UMS-Neiken Group Berhad is:

5.4% = RM5.4m ÷ RM101m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.05.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

UMS-Neiken Group Berhad's Earnings Growth And 5.4% ROE

It is quite clear that UMS-Neiken Group Berhad's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 5.4% either. Therefore, it might not be wrong to say that the five year net income decline of 18% seen by UMS-Neiken Group Berhad was possibly a result of the disappointing ROE.

As a next step, we compared UMS-Neiken Group Berhad's performance with the industry and found thatUMS-Neiken Group Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 9.3% in the same period, which is a slower than the company.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if UMS-Neiken Group Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is UMS-Neiken Group Berhad Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 39% (where it is retaining 61% of its profits), UMS-Neiken Group Berhad has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, UMS-Neiken Group 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.

Conclusion

In total, we're a bit ambivalent about UMS-Neiken Group Berhad's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for UMS-Neiken Group Berhad by visiting our risks dashboard for free on our platform here.

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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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