Advertisement
UK markets open in 3 hours 3 minutes
  • NIKKEI 225

    38,739.60
    -115.77 (-0.30%)
     
  • HANG SENG

    18,519.85
    -301.31 (-1.60%)
     
  • CRUDE OIL

    80.13
    +0.30 (+0.38%)
     
  • GOLD FUTURES

    2,358.00
    +1.50 (+0.06%)
     
  • DOW

    38,852.86
    -216.74 (-0.55%)
     
  • Bitcoin GBP

    53,894.04
    +499.74 (+0.94%)
     
  • CMC Crypto 200

    1,452.23
    -44.23 (-2.96%)
     
  • NASDAQ Composite

    17,019.88
    +99.08 (+0.59%)
     
  • UK FTSE All Share

    4,506.79
    -31.23 (-0.69%)
     

Is Weakness In Mestron Holdings Berhad (KLSE:MESTRON) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Mestron Holdings Berhad (KLSE:MESTRON) has had a rough three months with its share price down 25%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Mestron Holdings Berhad's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Mestron Holdings 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

ADVERTISEMENT

So, based on the above formula, the ROE for Mestron Holdings Berhad is:

9.2% = RM12m ÷ RM132m (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.09.

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. 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.

Mestron Holdings Berhad's Earnings Growth And 9.2% ROE

When you first look at it, Mestron Holdings Berhad's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.6%, is definitely interesting. Even more so after seeing Mestron Holdings Berhad's exceptional 30% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then performed a comparison between Mestron Holdings Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same 5-year period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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 Mestron Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mestron Holdings Berhad Making Efficient Use Of Its Profits?

Mestron Holdings Berhad's three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Mestron Holdings Berhad has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Mestron Holdings Berhad's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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.