Wong Engineering Corporation Berhad's (KLSE:WONG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Wong Engineering Corporation Berhad's (KLSE:WONG) recent performance, when its stock has declined 19% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Wong Engineering Corporation 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.

View our latest analysis for Wong Engineering Corporation Berhad

How To 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 Wong Engineering Corporation Berhad is:

4.6% = RM3.2m ÷ RM69m (Based on the trailing twelve months to October 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 MYR0.05 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Wong Engineering Corporation Berhad's Earnings Growth And 4.6% ROE

As you can see, Wong Engineering Corporation Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 8.3%, the company's ROE is quite dismal. In spite of this, Wong Engineering Corporation Berhad was able to grow its net income considerably, at a rate of 34% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Given that the industry shrunk its earnings at a rate of 0.2% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Wong Engineering Corporation Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Wong Engineering Corporation Berhad Efficiently Re-investing Its Profits?

The three-year median payout ratio for Wong Engineering Corporation Berhad is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Wong Engineering Corporation Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Wong Engineering Corporation 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.

Summary

On the whole, we do feel that Wong Engineering Corporation Berhad has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Wong Engineering Corporation Berhad visit our risks dashboard for free.

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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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