Eco World Development Group Berhad's (KLSE:ECOWLD) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?
Eco World Development Group Berhad's (KLSE:ECOWLD) stock is up by a considerable 46% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Eco World Development Group 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Eco World Development Group Berhad
How To Calculate Return On Equity?
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 Eco World Development Group Berhad is:
4.2% = RM202m ÷ RM4.8b (Based on the trailing twelve months to January 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.04 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Eco World Development Group Berhad's Earnings Growth And 4.2% ROE
As you can see, Eco World Development Group Berhad's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 4.2%. Accordingly, Eco World Development Group Berhad's low net income growth of 4.2% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Eco World Development Group Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.7% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Eco World Development Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Eco World Development Group Berhad Efficiently Re-investing Its Profits?
Eco World Development Group Berhad has a three-year median payout ratio of 74% (implying that it keeps only 26% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.
In addition, Eco World Development Group Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 61%. Regardless, the future ROE for Eco World Development Group Berhad is predicted to rise to 6.1% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, Eco World Development Group Berhad's performance is quite a big let-down. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.
