Ajinomoto (Malaysia) Berhad (KLSE:AJI) Stock's On A Decline: Are Poor Fundamentals The Cause?
With its stock down 6.9% over the past three months, it is easy to disregard Ajinomoto (Malaysia) Berhad (KLSE:AJI). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Ajinomoto (Malaysia) 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Ajinomoto (Malaysia) 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 Ajinomoto (Malaysia) Berhad is:
5.2% = RM27m ÷ RM529m (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 MYR0.05.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Ajinomoto (Malaysia) Berhad's Earnings Growth And 5.2% ROE
As you can see, Ajinomoto (Malaysia) Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 9.2%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 27% seen by Ajinomoto (Malaysia) Berhad was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
So, as a next step, we compared Ajinomoto (Malaysia) Berhad's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 22% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Ajinomoto (Malaysia) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Ajinomoto (Malaysia) Berhad Making Efficient Use Of Its Profits?
Ajinomoto (Malaysia) Berhad has a high three-year median payout ratio of 50% (that is, it is retaining 50% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely.
Moreover, Ajinomoto (Malaysia) Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
Overall, we would be extremely cautious before making any decision on Ajinomoto (Malaysia) Berhad. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Ajinomoto (Malaysia) Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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