ACO Group Berhad (KLSE:ACO) has performed well on the stock market with its share price up 10.0% over the past three months. However, the company’s key financial metrics appear to be different across the board, making us question whether the current share price momentum can be sustained. I decided to check the ROE of
Return on equity or ROE is an important factor for shareholders to consider as it indicates how effectively capital is being reinvested. Simply put, it is used to assess a company’s profitability in relation to its equity capital.
Read the latest analysis from ACO Group Berhad.
How to calculate return on equity
of ROE formula teeth:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
Therefore, based on the above formula, ACO Group Berhad’s ROE would be:
9.3% = RM8.2m ÷ RM88m (based on last 12 months to August 2022).
“Return” refers to the company’s earnings for the last year. Another way to think about this is that for each MYR1 worth of shares, the company was able to earn his MYR0.09 profit.
Why ROE Is Important to Profit Growth
It has already been established that ROE serves as an efficient profit-making metric to gauge a company’s future earnings. Based on the amount of profits the company chooses to reinvest or “retain”, the company’s ability to generate profits in the future can be assessed. Generally speaking, other things being equal, companies with high return on equity and earnings retention will have higher growth rates than companies that do not share these attributes.
ACO Group Berhad revenue growth and 9.3% ROE
At first glance, ACO Group Berhad’s ROE doesn’t look very promising. However, ROE is about the same as the industry average of 9.0%, so it cannot be generalized. ACO Group Berhad’s five-year average net profit growth rate of 4.4% is slightly lower. Remember, a company’s ROE isn’t particularly good to begin with. So this sets the backdrop for the lower revenue growth seen by the company.
Next, when compared to the industry’s net profit growth, we find that ACO Group Berhad’s reported growth rate is lower than the industry’s growth rate of 14% over the same period. This is not what we want to see.
The foundation for adding value to a company is largely tied to revenue growth. The next thing investors need to determine is whether expected earnings growth, or lack thereof, is already baked into the stock price. Doing so will help establish whether the stock’s future looks promising or ominous. Is ACO Group Berhad rated fairly compared to other companies? These three rating scales may help you decide.
Is ACO Group Berhad efficiently reinvesting its profits?
A low three-year average dividend yield of 12% (meaning the company retains the remaining 88% of its income) suggests that ACO Group Berhad retains most of its profits. I’m here. However, high growth is typically followed by sustained high profit margins, so the low profit growth numbers do not reflect this. So there may be some other reason explaining the lack in that respect. For example, your business may be in decline.
Just recently, ACO Group Berhad started paying dividends. This means that management may have concluded that shareholders prefer dividends to earnings growth.
Overall, ACO Group Berhad’s performance is a bit ambiguous. The company’s profit retention rate is strong, but low profitability may hamper earnings growth. In summary, proceed with caution with this company. One way he does that is by looking at the risk profile of the business. To learn about the single risk we’ve identified for ACO Group Berhad, visit our risk dashboard for free.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …
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