Does The Market Have A Low Tolerance For Excel Force MSC Berhad's (KLSE:EFORCE) Mixed Fundamentals?

It is hard to get excited after looking at Excel Force MSC Berhad's (KLSE:EFORCE) recent performance, when its stock has declined 5.3% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Excel Force MSC Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Excel Force MSC 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 Excel Force MSC Berhad is:

9.3% = RM8.6m ÷ RM93m (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 MYR0.09.

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. 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.

A Side By Side comparison of Excel Force MSC Berhad's Earnings Growth And 9.3% ROE

On the face of it, Excel Force MSC Berhad's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.7%. Still, Excel Force MSC Berhad has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing Excel Force MSC 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 1.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Excel Force MSC Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Excel Force MSC Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 81% (meaning, the company retains only 19% of profits) for Excel Force MSC Berhad suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Excel Force MSC Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 93%. Accordingly, forecasts suggest that Excel Force MSC Berhad's future ROE will be 9.8% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that the performance shown by Excel Force MSC Berhad can be open to many interpretations. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. 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 decline, albeit marginally. 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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