Is Thong Guan Industries Berhad's(KLSE:TGUAN) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Thong Guan Industries Berhad's (KLSE:TGUAN) stock increased significantly by 6.3% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Thong Guan Industries 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Thong Guan Industries Berhad

How Do You Calculate Return On Equity?

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 Thong Guan Industries Berhad is:

12% = RM81m ÷ RM653m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Thong Guan Industries Berhad's Earnings Growth And 12% ROE

At first glance, Thong Guan Industries Berhad seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. Probably as a result of this, Thong Guan Industries Berhad was able to see a decent growth of 9.9% over the last five years.

Next, on comparing with the industry net income growth, we found that Thong Guan Industries Berhad's growth is quite high when compared to the industry average growth of 4.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Is Thong Guan Industries Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Thong Guan Industries Berhad Using Its Retained Earnings Effectively?

Thong Guan Industries Berhad's three-year median payout ratio to shareholders is 25% (implying that it retains 75% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Thong Guan Industries Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 30%. Accordingly, forecasts suggest that Thong Guan Industries Berhad's future ROE will be 13% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Thong Guan Industries 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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. 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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