Is The Market Rewarding IOI Corporation Berhad (KLSE:IOICORP) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at IOI Corporation Berhad's (KLSE:IOICORP) recent performance, when its stock has declined 1.5% over the past week. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study IOI 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.

See our latest analysis for IOI Corporation Berhad

How Is ROE Calculated?

ROE 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 IOI Corporation Berhad is:

7.5% = RM887m ÷ RM12b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.07 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of IOI Corporation Berhad's Earnings Growth And 7.5% ROE

When you first look at it, IOI Corporation Berhad's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.4%, so we won't completely dismiss the company. Even so, IOI Corporation Berhad has shown a fairly decent growth in its net income which grew at a rate of 19%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared IOI 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 25% in the same 5-year period, which is a bit concerning.

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). 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 IOI Corporation Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is IOI Corporation Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 50% (or a retention ratio of 50%) for IOI Corporation Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, IOI 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 49% of its profits over the next three years. Still, forecasts suggest that IOI Corporation Berhad's future ROE will rise to 10% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that the performance shown by IOI Corporation Berhad can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.