Excel Force MSC Berhad's (KLSE:EFORCE) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
November 26, 2021
KLSE:EFORCE
Source: Shutterstock

With its stock down 10% over the past week, it is easy to disregard Excel Force MSC Berhad (KLSE:EFORCE). 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. In this article, we decided to focus on Excel Force MSC 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Excel Force MSC Berhad

How To 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 Excel Force MSC Berhad is:

15% = RM14m ÷ RM98m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.15.

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Excel Force MSC Berhad's Earnings Growth And 15% ROE

To begin with, Excel Force MSC Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This certainly adds some context to Excel Force MSC Berhad's decent 18% net income growth seen over the past five years.

We then compared Excel Force MSC 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 10% in the same period.

past-earnings-growth
KLSE:EFORCE Past Earnings Growth November 27th 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Excel Force MSC Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Excel Force MSC Berhad Making Efficient Use Of Its Profits?

While Excel Force MSC Berhad has a three-year median payout ratio of 78% (which means it retains 22% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Excel Force MSC Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with Excel Force MSC Berhad's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Excel Force MSC Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.