Yahoo Finance IJM Corporation Berhad's (KLSE:IJM) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?
IJM Corporation Berhad (KLSE:IJM) has had a great run on the share market with its stock up by a significant 41% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to IJM Corporation 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 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 IJM Corporation Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for IJM Corporation Berhad is:
5.9% = RM665m ÷ RM11b (Based on the trailing twelve months to March 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.06 in profit.
Why Is ROE Important For 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. 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.
IJM Corporation Berhad's Earnings Growth And 5.9% ROE
On the face of it, IJM Corporation Berhad's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.2%. Having said that, IJM Corporation Berhad's five year net income decline rate was 6.3%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.2% in the same 5-year period, we still found IJM Corporation Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for IJM? You can find out in our latest intrinsic value infographic research report.
Is IJM Corporation Berhad Using Its Retained Earnings Effectively?
IJM Corporation Berhad's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 84% (or a retention ratio of 16%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.
Additionally, IJM Corporation Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 38% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.
Summary
Overall, we would be extremely cautious before making any decision on IJM Corporation Berhad. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.
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