Will Weakness in Frontken Corporation Berhad's (KLSE:FRONTKN) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 20% over the past three months, it is easy to disregard Frontken Corporation Berhad (KLSE:FRONTKN). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Frontken Corporation Berhad's ROE in this article.

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

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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 Frontken Corporation Berhad is:

20% = RM151m ÷ RM773m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.20.

View our latest analysis for Frontken Corporation Berhad

What Has ROE Got To Do With 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.

Frontken Corporation Berhad's Earnings Growth And 20% ROE

To start with, Frontken Corporation Berhad's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.1%. This certainly adds some context to Frontken Corporation Berhad's decent 12% net income growth seen over the past five years.

As a next step, we compared Frontken Corporation Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Frontken Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Frontken Corporation Berhad Making Efficient Use Of Its Profits?

Frontken Corporation Berhad has a significant three-year median payout ratio of 51%, meaning that it is left with only 49% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Frontken Corporation Berhad has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 38% over the next three years. As a result, the expected drop in Frontken Corporation Berhad's payout ratio explains the anticipated rise in the company's future ROE to 25%, over the same period.

Summary

Overall, we are quite pleased with Frontken Corporation Berhad's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.