Most readers would already be aware that Aurelius Technologies Berhad’s (KLSE:ATECH) stock increased significantly by 6.7% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Aurelius Technologies Berhad’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Aurelius Technologies Berhad
How Do You Calculate Return On Equity?
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 Aurelius Technologies Berhad is:
14% = RM44m ÷ RM320m (Based on the trailing twelve months to July 2023).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.14 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Aurelius Technologies Berhad’s Earnings Growth And 14% ROE
To begin with, Aurelius Technologies Berhad seems to have a respectable ROE. Even when compared to the industry average of 12% the company’s ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Aurelius Technologies Berhad.
As a next step, we compared Aurelius Technologies 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 22% in the same period.
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. Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Aurelius Technologies Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Aurelius Technologies Berhad Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Aurelius Technologies Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
While Aurelius Technologies Berhad has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 51% over the next three years. Still, forecasts suggest that Aurelius Technologies Berhad’s future ROE will rise to 20% even though the the company’s payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company’s ROE.
Summary
On the whole, we feel that Aurelius Technologies Berhad’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
