Press Metal Aluminium Holdings Berhad's (KLSE:PMETAL) Stock Has Fared Decently: Is the Market Following Strong Financials?

Most readers would already know that Press Metal Aluminium Holdings Berhad's (KLSE:PMETAL) stock increased by 2.3% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. 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 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 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 Press Metal Aluminium Holdings Berhad is:

18% = RM1.5b ÷ RM8.0b (Based on the trailing twelve months to June 2023).

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 MYR0.18 in profit.

What Has ROE Got To Do With 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. 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 18% ROE

To begin with, Press Metal Aluminium Holdings Berhad seems to have a respectable ROE. Especially when compared to the industry average of 5.6% the company's ROE looks pretty impressive. This probably laid the ground for Press Metal Aluminium Holdings Berhad's significant 24% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Press Metal Aluminium Holdings Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 26% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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's three-year median payout ratio is a pretty moderate 35%, meaning the company retains 65% of its income. 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.

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 is expected to rise to 43% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Press Metal Aluminium Holdings Berhad's performance has been quite good. 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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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. 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.