VSTECS Berhad's (KLSE:VSTECS) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that VSTECS Berhad's (KLSE:VSTECS) stock increased significantly by 58% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to VSTECS 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.

View our latest analysis for VSTECS 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 VSTECS Berhad is:

15% = RM67m ÷ RM456m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.15 in profit.

What Is The Relationship Between ROE And 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.

VSTECS Berhad's Earnings Growth And 15% ROE

To begin with, VSTECS Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. Probably as a result of this, VSTECS Berhad was able to see an impressive net income growth of 21% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between VSTECS Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is VSTECS Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is VSTECS Berhad Making Efficient Use Of Its Profits?

The three-year median payout ratio for VSTECS Berhad is 34%, which is moderately low. The company is retaining the remaining 66%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like VSTECS Berhad is reinvesting its earnings efficiently.

Additionally, VSTECS Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Accordingly, forecasts suggest that VSTECS Berhad's future ROE will be 15% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with VSTECS Berhad's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.