SAM Engineering & Equipment (M) Berhad's (KLSE:SAM) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 24% over the past three months, it is easy to disregard SAM Engineering & Equipment (M) Berhad (KLSE:SAM). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to SAM Engineering & Equipment (M) 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for SAM Engineering & Equipment (M) Berhad is:

6.6% = RM92m ÷ RM1.4b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.07 in profit.

See our latest analysis for SAM Engineering & Equipment (M) Berhad

What Is The Relationship Between ROE And 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. 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.

SAM Engineering & Equipment (M) Berhad's Earnings Growth And 6.6% ROE

On the face of it, SAM Engineering & Equipment (M) Berhad's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.6%, we may spare it some thought. On the other hand, SAM Engineering & Equipment (M) Berhad reported a moderate 8.6% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between SAM Engineering & Equipment (M) Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.6% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is SAM Engineering & Equipment (M) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SAM Engineering & Equipment (M) Berhad Using Its Retained Earnings Effectively?

SAM Engineering & Equipment (M) Berhad's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, SAM Engineering & Equipment (M) 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 20% of its profits over the next three years. However, SAM Engineering & Equipment (M) Berhad's ROE is predicted to rise to 8.4% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that SAM Engineering & Equipment (M) Berhad certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.