Supermax Corporation Berhad's (KLSE:SUPERMX) Stock Is Going Strong: Have Financials A Role To Play?

Supermax Corporation Berhad (KLSE:SUPERMX) has had a great run on the share market with its stock up by a significant 166% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Supermax Corporation Berhad's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Supermax Corporation Berhad

How Is ROE Calculated?

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 Supermax Corporation Berhad is:

8.8% = RM103m ÷ RM1.2b (Based on the trailing twelve months to December 2019).

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 MYR0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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 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.

Supermax Corporation Berhad's Earnings Growth And 8.8% ROE

On the face of it, Supermax Corporation Berhad's ROE is not much to talk about. Next, when compared to the average industry ROE of 16%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Supermax Corporation Berhad's low net income growth of 4.6% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing Supermax Corporation Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.2% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Supermax Corporation Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Supermax Corporation Berhad Efficiently Re-investing Its Profits?

While Supermax Corporation Berhad has a decent three-year median payout ratio of 34% (or a retention ratio of 66%), it has seen very little growth in earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 44% over the next three years. Regardless, the future ROE for Supermax Corporation Berhad is speculated to rise to 16% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we do feel that Supermax Corporation Berhad has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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. Thank you for reading.