Telekom Malaysia Berhad's (KLSE:TM) Stock Has Fared Decently: Is the Market Following Strong Financials?
Telekom Malaysia Berhad's (KLSE:TM) stock up by 2.2% 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. Particularly, we will be paying attention to Telekom Malaysia Berhad's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Telekom Malaysia Berhad
How To 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 Telekom Malaysia Berhad is:
14% = RM1.1b ÷ RM8.1b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.14 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Telekom Malaysia Berhad's Earnings Growth And 14% ROE
To begin with, Telekom Malaysia Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.7%. This probably laid the ground for Telekom Malaysia Berhad's moderate 19% net income growth seen over the past five years.
As a next step, we compared Telekom Malaysia Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is TM worth today? The intrinsic value infographic in our free research report helps visualize whether TM is currently mispriced by the market.
Is Telekom Malaysia Berhad Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Telekom Malaysia Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Telekom Malaysia Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 52%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 15%.
Conclusion
In total, we are pretty happy with Telekom Malaysia Berhad's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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