Will Weakness in AME Elite Consortium Berhad's (KLSE:AME) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at AME Elite Consortium Berhad's (KLSE:AME) recent performance, when its stock has declined 3.6% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on AME Elite Consortium Berhad's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for AME Elite Consortium Berhad

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for AME Elite Consortium Berhad is:

13% = RM144m ÷ RM1.1b (Based on the trailing twelve months to March 2023).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.13.

What Is The Relationship Between ROE And 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.

AME Elite Consortium Berhad's Earnings Growth And 13% ROE

To begin with, AME Elite Consortium Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 4.1%. This probably laid the ground for AME Elite Consortium Berhad's moderate 6.1% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 4.9% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is AME Elite Consortium Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AME Elite Consortium Berhad Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that AME Elite Consortium Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, AME Elite Consortium Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. Regardless, AME Elite Consortium Berhad's ROE is speculated to decline to 9.1% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with AME Elite Consortium Berhad's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.

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.

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