IDB Technologies Berhad's (KLSE:IDBTECH) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 30% over the past week, it is easy to disregard IDB Technologies Berhad (KLSE:IDBTECH). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on IDB Technologies 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.

View our latest analysis for IDB Technologies Berhad

How Is ROE Calculated?

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 IDB Technologies Berhad is:

24% = RM1.4m ÷ RM5.6m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.24 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

IDB Technologies Berhad's Earnings Growth And 24% ROE

First thing first, we like that IDB Technologies Berhad has an impressive ROE. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. Under the circumstances, IDB Technologies Berhad's considerable five year net income growth of 67% was to be expected.

Next, on comparing with the industry net income growth, we found that IDB Technologies Berhad's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.

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 IDB Technologies Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is IDB Technologies Berhad Making Efficient Use Of Its Profits?

IDB Technologies Berhad's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. So it seems that IDB Technologies Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

While IDB Technologies Berhad has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we feel that IDB Technologies Berhad's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 5 risks we have identified for IDB Technologies Berhad visit our risks dashboard for free.

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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.