Ramssol Group Berhad's (KLSE:RAMSSOL) Stock Is Going Strong: Is the Market Following Fundamentals?
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.
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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 Ramssol Group Berhad is:
13% = RM16m ÷ RM126m (Based on the trailing twelve months to March 2025).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.13 in profit.
Check out our latest analysis for Ramssol Group Berhad
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Ramssol Group Berhad's Earnings Growth And 13% ROE
At first glance, Ramssol Group Berhad seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 17% does temper our expectations. Still, we can see that Ramssol Group Berhad has seen a remarkable net income growth of 26% over the past five years. We reckon that there could be other factors at play here. 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. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
Next, on comparing Ramssol Group Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 26% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Ramssol Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Ramssol Group Berhad Using Its Retained Earnings Effectively?
Ramssol Group Berhad has a really low three-year median payout ratio of 6.4%, meaning that it has the remaining 94% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Our latest analyst data shows that the future payout ratio of the company is expected to rise to 9.3% over the next three years. Regardless, the future ROE for Ramssol Group Berhad is speculated to rise to 19% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
Summary
In total, we are pretty happy with Ramssol Group Berhad's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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