Amway (Malaysia) Holdings Berhad's (KLSE:AMWAY) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) has had a great run on the share market with its stock up by a significant 36% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Amway (Malaysia) Holdings Berhad's ROE.

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

See our latest analysis for Amway (Malaysia) Holdings Berhad

How To Calculate Return On Equity?

ROE 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 Amway (Malaysia) Holdings Berhad is:

38% = RM116m ÷ RM308m (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 MYR0.38.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Amway (Malaysia) Holdings Berhad's Earnings Growth And 38% ROE

Firstly, we acknowledge that Amway (Malaysia) Holdings Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. This likely paved the way for the modest 11% net income growth seen by Amway (Malaysia) Holdings Berhad over the past five years.

Next, on comparing with the industry net income growth, we found that Amway (Malaysia) Holdings Berhad's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Amway (Malaysia) Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Amway (Malaysia) Holdings Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 60% (or a retention ratio of 40%) for Amway (Malaysia) Holdings Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Amway (Malaysia) Holdings 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 is expected to rise to 77% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 29% over the same period.

Summary

On the whole, we do feel that Amway (Malaysia) Holdings Berhad has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.