Is Press Metal Aluminium Holdings Berhad's(KLSE:PMETAL) Recent Stock Performance Tethered To Its Strong Fundamentals?

Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) has had a great run on the share market with its stock up by a significant 45% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Press Metal Aluminium Holdings Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Press Metal Aluminium Holdings Berhad

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 Press Metal Aluminium Holdings Berhad is:

12% = RM570m ÷ RM4.6b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.12 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Press Metal Aluminium Holdings Berhad's Earnings Growth And 12% ROE

At first glance, Press Metal Aluminium Holdings Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 3.3%. This probably laid the ground for Press Metal Aluminium Holdings Berhad's moderate 12% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Press Metal Aluminium Holdings Berhad compares quite favourably to the industry average, which shows a decline of 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Press Metal Aluminium Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Press Metal Aluminium Holdings Berhad Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 41% (implying that the company retains 59% of its profits), it seems that Press Metal Aluminium Holdings Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Press Metal Aluminium Holdings Berhad 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 41%. Regardless, the future ROE for Press Metal Aluminium Holdings Berhad is predicted to rise to 24% despite there being not much change expected in its payout ratio.

Summary

In total, we are pretty happy with Press Metal Aluminium Holdings Berhad's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.
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