Is Weakness In Thong Guan Industries Berhad (KLSE:TGUAN) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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Thong Guan Industries Berhad (KLSE:TGUAN) has had a rough three months with its share price down 7.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Thong Guan Industries Berhad’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Thong Guan Industries Berhad

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Thong Guan Industries Berhad is:

13% = RM107m ÷ RM840m (Based on the trailing twelve months to September 2022).

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 MYR0.13 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. 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.

Thong Guan Industries Berhad’s Earnings Growth And 13% ROE

To start with, Thong Guan Industries Berhad’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 11%. This probably goes some way in explaining Thong Guan Industries Berhad’s significant 21% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Thong Guan Industries Berhad’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 21% in the same period.

past-earnings-growth

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Thong Guan Industries Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Thong Guan Industries Berhad Using Its Retained Earnings Effectively?

Thong Guan Industries Berhad’s three-year median payout ratio to shareholders is 23%, which is quite low. This implies that the company is retaining 77% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Thong Guan Industries Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Thong Guan Industries Berhad’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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