Is Weakness In ViTrox Corporation Berhad (KLSE:VITROX) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

ViTrox Corporation Berhad (KLSE:VITROX) has had a rough three months with its share price down 26%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to ViTrox Corporation Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 ViTrox Corporation Berhad is:

8.8% = RM89m ÷ RM1.0b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.09 in profit.

Check out our latest analysis for ViTrox Corporation Berhad

What Is The Relationship Between ROE And Earnings Growth?

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

ViTrox Corporation Berhad's Earnings Growth And 8.8% ROE

At first glance, ViTrox Corporation Berhad's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 4.6% which we definitely can't overlook. Still, ViTrox Corporation Berhad's net income growth of 4.6% over the past five years was mediocre at best. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared ViTrox Corporation 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 1.5%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ViTrox Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ViTrox Corporation Berhad Using Its Retained Earnings Effectively?

ViTrox Corporation Berhad's low three-year median payout ratio of 23% (or a retention ratio of 77%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, ViTrox Corporation Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 26%. Still, forecasts suggest that ViTrox Corporation Berhad's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with ViTrox Corporation Berhad's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.