Is Asia Brands Berhad's (KLSE:ASIABRN) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Asia Brands Berhad's (KLSE:ASIABRN) stock is up by a considerable 116% over the past 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. Specifically, we decided to study Asia Brands Berhad's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Asia Brands 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 Asia Brands Berhad is:

5.9% = RM12m ÷ RM208m (Based on the trailing twelve months to September 2020).

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 MYR0.06.

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. 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. 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 Asia Brands Berhad's Earnings Growth And 5.9% ROE

It is hard to argue that Asia Brands Berhad's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 6.5% either. However, the exceptional 48% net income growth seen by Asia Brands Berhad over the past five years is pretty remarkable. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. 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.

We then compared Asia Brands Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Asia Brands Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Asia Brands Berhad Efficiently Re-investing Its Profits?

Asia Brands Berhad doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, it does look like Asia Brands Berhad has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Asia Brands Berhad by visiting our risks dashboard for free on our platform here.

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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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