Gas Malaysia Berhad's (KLSE:GASMSIA) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Gas Malaysia Berhad's (KLSE:GASMSIA) stock up by 6.3% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Gas Malaysia Berhad's ROE today.

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.

View our latest analysis for Gas Malaysia 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 Gas Malaysia Berhad is:

30% = RM403m ÷ RM1.4b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.30 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Gas Malaysia Berhad's Earnings Growth And 30% ROE

First thing first, we like that Gas Malaysia Berhad has an impressive ROE. Secondly, even when compared to the industry average of 9.7% the company's ROE is quite impressive. This likely paved the way for the modest 19% net income growth seen by Gas Malaysia Berhad over the past five years.

We then compared Gas Malaysia 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 8.6% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 GASMSIA fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Gas Malaysia Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 76% (or a retention ratio of 24%) for Gas Malaysia Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Gas Malaysia 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. 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 75%. However, Gas Malaysia Berhad's future ROE is expected to decline to 23% despite there being not much change anticipated in the company's payout ratio.

Conclusion

In total, we are pretty happy with Gas Malaysia Berhad's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.

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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.