Are Poor Financial Prospects Dragging Down Imaspro Corporation Berhad (KLSE:IMASPRO Stock?

It is hard to get excited after looking at Imaspro Corporation Berhad's (KLSE:IMASPRO) recent performance, when its stock has declined 8.6% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Imaspro 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Imaspro Corporation Berhad

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 Imaspro Corporation Berhad is:

2.5% = RM3.1m ÷ RM128m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Imaspro Corporation Berhad's Earnings Growth And 2.5% ROE

It is hard to argue that Imaspro Corporation Berhad's ROE is much good in and of itself. Even when compared to the industry average of 5.8%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 24% seen by Imaspro Corporation Berhad was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 7.1% in the same period, we still found Imaspro Corporation Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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 Imaspro Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Imaspro Corporation Berhad Using Its Retained Earnings Effectively?

Imaspro Corporation Berhad has a high three-year median payout ratio of 80% (that is, it is retaining 20% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 2 risks we have identified for Imaspro Corporation Berhad by visiting our risks dashboard for free on our platform here.

In addition, Imaspro Corporation Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Imaspro Corporation Berhad's performance is quite a big let-down. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Imaspro Corporation Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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