Is Weakness In Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 2.5% over the past three months, it is easy to disregard Press Metal Aluminium Holdings Berhad (KLSE:PMETAL). 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. Specifically, we decided to study Press Metal Aluminium Holdings Berhad's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Press Metal Aluminium Holdings Berhad

How To Calculate Return On Equity?

The formula for ROE 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:

18% = RM1.5b ÷ RM8.4b (Based on the trailing twelve months to December 2023).

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 MYR0.18.

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. 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.

Press Metal Aluminium Holdings Berhad's Earnings Growth And 18% ROE

To begin with, Press Metal Aluminium Holdings Berhad seems to have a respectable ROE. Especially when compared to the industry average of 5.9% the company's ROE looks pretty impressive. Probably as a result of this, Press Metal Aluminium Holdings Berhad was able to see an impressive net income growth of 24% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Press Metal Aluminium Holdings Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 24% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for PMETAL? You can find out in our latest intrinsic value infographic research report.

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

The three-year median payout ratio for Press Metal Aluminium Holdings Berhad is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Press Metal Aluminium Holdings Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Press Metal Aluminium Holdings Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 18%.

Summary

Overall, we are quite pleased with Press Metal Aluminium Holdings Berhad's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.