It’s hard to get excited when looking at Three-A Resources Berhad’s (KLSE:3A) recent performance after the stock fell 6.2% over the past month. But if you look closely, you might find that the key financial indicators look pretty decent, which could mean the stock could potentially rise in the long term as markets typically reward more robust long-term fundamentals. In particular, we’ll be paying attention to Three-A Resources Berhad’s return on equity today.
Return on equity, or ROE, is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates relative to their shareholder investment.
Check out our latest analysis for Three-A Resources Berhad
How do you calculate return on equity?
The Formula for return on equity Is:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Three-A Resources Berhad is:
12% = RM53 million ÷ RM463 million (based on the last twelve months to March 2024).
The “return” refers to a company’s earnings over the last year. This means that for every MYR of equity, the company generated a profit of MYR0.12.
Why is return on equity (ROE) important for earnings growth?
We have already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Depending on how much of those earnings the company reinvests or “retains” and how effectively it does so, we can assess a company’s earnings growth potential. Generally speaking, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics, all other things being equal.
Earnings growth and return on equity of Three-A Resources Berhad
At first glance, Three-A Resources Berhad’s return on equity doesn’t look very promising. However, what’s interesting is that the company’s return on equity is higher than the industry average return on equity of 9.1%. This adds some context to Three-A Resources Berhad’s modest net income growth of 7.0% over the past five years. Keep in mind that the company has a relatively low return on equity. It’s just that the industry’s return on equity is lower. So there could well be other reasons for the earnings growth. For example, it’s possible that the industry as a whole is going through a period of high growth, or that the company has a low payout ratio.
Next, when we compared it with the industry’s net income growth, we found that Three-A Resources Berhad’s reported growth was below the industry growth of 24% over the past few years, which is something we don’t like to see.
Earnings growth is an important yardstick when evaluating a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or earnings decline). This will help them determine whether the stock’s future looks promising or bleak. If you’re wondering about Three-A Resources Berhad’s valuation, check out this gauge of its price-to-earnings ratio compared to the industry.
Does Three-A Resources Berhad use its profits efficiently?
With a three-year average payout ratio of 30% (meaning the company retains 70% of its earnings), Three-A Resources Berhad appears to be reinvesting efficiently, allowing it to post a decent increase in earnings and pay a well-covered dividend.
In addition, Three-A Resources Berhad has paid dividends for at least ten years, which means that the company is very serious about sharing profits with its shareholders.
Summary
Overall, we think that Three-A Resources Berhad does have some positive factors. In particular, we like that the company reinvests a large portion of its profits at a decent rate of return. This has naturally led to the company posting good earnings growth. While we are not dismissive of the company entirely, we would try to determine the risk of the company to make a more informed decision about the company. You can view the 1st risk we have identified for Three-A Resources Berhad on our website. Risk Dashboard free on our platform here.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
