Uchi Technologies Berhad's (KLSE:UCHITEC) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Uchi Technologies Berhad (KLSE:UCHITEC) has had a rough month with its share price down 7.0%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Uchi Technologies Berhad's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Uchi Technologies 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 Uchi Technologies Berhad is:

40% = RM71m ÷ RM177m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.40 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. 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.

Uchi Technologies Berhad's Earnings Growth And 40% ROE

Firstly, we acknowledge that Uchi Technologies Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.7% also doesn't go unnoticed by us. This likely paved the way for the modest 9.0% net income growth seen by Uchi Technologies Berhad over the past five years. growth

As a next step, we compared Uchi Technologies 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 1.3%.

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). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Uchi Technologies Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Uchi Technologies Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 94% (or a retention ratio of 5.6%) for Uchi Technologies Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Uchi Technologies 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 89%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 46%.

Conclusion

In total, it does look like Uchi Technologies Berhad has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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