Press Metal Aluminium Holdings Berhad's (KLSE:PMETAL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 8.3% over the past week, it is easy to disregard Press Metal Aluminium Holdings Berhad (KLSE:PMETAL). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Press Metal Aluminium Holdings Berhad's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Press Metal Aluminium Holdings Berhad

How Is ROE Calculated?

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:

20% = RM1.7b ÷ RM8.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.20 in profit.

Why Is ROE Important For 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.

Press Metal Aluminium Holdings Berhad's Earnings Growth And 20% ROE

At first glance, Press Metal Aluminium Holdings Berhad seems to have a decent ROE. Especially when compared to the industry average of 5.8% 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 believe that there might also be other aspects that are positively influencing the company's earnings growth. 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.

As a next step, we compared Press Metal Aluminium Holdings Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

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). This then helps them determine if the stock is placed for a bright or bleak future. What is PMETAL worth today? The intrinsic value infographic in our free research report helps visualize whether PMETAL is currently mispriced by the market.

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

Press Metal Aluminium Holdings Berhad has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 42%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 23%.

Conclusion

Overall, we are quite pleased 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com