Yahoo Finance Has Amway (Malaysia) Holdings Berhad's (KLSE:AMWAY) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Amway (Malaysia) Holdings Berhad's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Amway (Malaysia) Holdings Berhad
How Is ROE Calculated?
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 Amway (Malaysia) Holdings Berhad is:
38% = RM116m ÷ RM308m (Based on the trailing twelve months to December 2023).
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 MYR0.38 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Amway (Malaysia) Holdings Berhad's Earnings Growth And 38% ROE
Firstly, we acknowledge that Amway (Malaysia) Holdings Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. This likely paved the way for the modest 11% net income growth seen by Amway (Malaysia) Holdings Berhad over the past five years.
Next, on comparing with the industry net income growth, we found that Amway (Malaysia) Holdings Berhad's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Amway (Malaysia) Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Amway (Malaysia) Holdings Berhad Efficiently Re-investing Its Profits?
Amway (Malaysia) Holdings Berhad has a significant three-year median payout ratio of 60%, meaning that it is left with only 40% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, Amway (Malaysia) Holdings 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 77% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 29% over the same period.
Conclusion
On the whole, we do feel that Amway (Malaysia) Holdings Berhad has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
