ITMAX System Berhad’s (KLSE:ITMAX) stock is up by a considerable 21% 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. In this article, we decided to focus on ITMAX System Berhad’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for ITMAX System Berhad
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for ITMAX System Berhad is:
18% = RM59m ÷ RM326m (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.18 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
ITMAX System Berhad’s Earnings Growth And 18% ROE
To begin with, ITMAX System Berhad seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 12%. This certainly adds some context to ITMAX System Berhad’s exceptional 45% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as – high earnings retention or an efficient management in place.
As a next step, we compared ITMAX System 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 22%.
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 ITMAX System Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is ITMAX System Berhad Using Its Retained Earnings Effectively?
ITMAX System Berhad’s ‘ three-year median payout ratio is on the lower side at 1.9% implying that it is retaining a higher percentage (98%) 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.
While ITMAX System Berhad has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 20% over the next three years. Regardless, the future ROE for ITMAX System Berhad is speculated to rise to 22% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
Conclusion
In total, we are pretty happy with ITMAX System Berhad’s performance. 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. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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. 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.
