Is Weakness In Alpha IVF Group Berhad (KLSE:ALPHA) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Alpha IVF Group Berhad (KLSE:ALPHA) has had a rough three months with its share price down 12%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Alpha IVF 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alpha IVF Group Berhad is:

29% = RM58m ÷ RM198m (Based on the trailing twelve months to November 2024).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.29.

Check out our latest analysis for Alpha IVF Group Berhad

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Alpha IVF Group Berhad's Earnings Growth And 29% ROE

Firstly, we acknowledge that Alpha IVF Group Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. So, the substantial 39% net income growth seen by Alpha IVF Group Berhad over the past five years isn't overly surprising.

We then compared Alpha IVF Group Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Alpha IVF Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Alpha IVF Group Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 59% (implying that it keeps only 41% of profits) for Alpha IVF Group Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While Alpha IVF Group Berhad has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 54%. Accordingly, forecasts suggest that Alpha IVF Group Berhad's future ROE will be 33% which is again, similar to the current ROE.

Summary

On the whole, we feel that Alpha IVF Group Berhad's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.