Is Ingenieur Gudang Berhad's (KLSE:INGENIEU) Recent Stock Performance Influenced By Its Financials In Any Way?

Ingenieur Gudang Berhad's (KLSE:INGENIEU) stock up by 9.1% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Ingenieur Gudang 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 Ingenieur Gudang 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 Ingenieur Gudang Berhad is:

6.2% = RM9.4m ÷ RM152m (Based on the trailing twelve months to August 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 in profit.

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. 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.

Ingenieur Gudang Berhad's Earnings Growth And 6.2% ROE

When you first look at it, Ingenieur Gudang Berhad's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.0%, we may spare it some thought. Particularly, the exceptional 49% net income growth seen by Ingenieur Gudang Berhad over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Ingenieur Gudang Berhad compares quite favourably to the industry average, which shows a decline of 3.4% over the last few years.

Earnings growth is a huge factor in stock valuation. 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 Ingenieur Gudang Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ingenieur Gudang Berhad Using Its Retained Earnings Effectively?

Ingenieur Gudang Berhad doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, it does look like Ingenieur Gudang Berhad has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 6 risks we have identified for Ingenieur Gudang Berhad.

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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.