Is Top Glove Corporation Bhd.'s (KLSE:TOPGLOV) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Top Glove Corporation Bhd's (KLSE:TOPGLOV) stock is up by a considerable 101% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Top Glove Corporation Bhd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Top Glove Corporation Bhd

How Do You 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 Top Glove Corporation Bhd is:

14% = RM652m ÷ RM4.7b (Based on the trailing twelve months to May 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.14 in profit.

Why Is ROE Important For 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 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.

Top Glove Corporation Bhd's Earnings Growth And 14% ROE

To start with, Top Glove Corporation Bhd's ROE looks acceptable. Be that as it may, the company's ROE is still quite lower than the industry average of 21%. However, the moderate 8.9% net income growth seen by Top Glove Corporation Bhd over the past five years is definitely a positive. We reckon that there could be other factors at play here. 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. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.

We then compared Top Glove Corporation Bhd'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 4.5% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Top Glove Corporation Bhd is trading on a high P/E or a low P/E, relative to its industry.

Is Top Glove Corporation Bhd Using Its Retained Earnings Effectively?

Top Glove Corporation Bhd has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% 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.

Moreover, Top Glove Corporation Bhd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 56%. Regardless, the future ROE for Top Glove Corporation Bhd is predicted to rise to 40% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Top Glove Corporation Bhd certainly does have some positive factors to consider. Specifically, its respectable ROE which likely led to the considerable growth in earnings. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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