YX Precious Metals Bhd (KLSE:YXPM) has had a great run on the share market with its stock up by a significant 7.3% over the last month. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Specifically, we decided to study YX Precious Metals Bhd’s ROE in this article.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for YX Precious Metals Bhd
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for YX Precious Metals Bhd is:
9.9% = RM10m ÷ RM104m (Based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.10 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. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
YX Precious Metals Bhd’s Earnings Growth And 9.9% ROE
On the face of it, YX Precious Metals Bhd’s ROE is not much to talk about. However, its ROE is similar to the industry average of 9.9%, so we won’t completely dismiss the company. Moreover, we are quite pleased to see that YX Precious Metals Bhd’s net income grew significantly at a rate of 26% over the last 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.
Next, on comparing with the industry net income growth, we found that YX Precious Metals Bhd’s growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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. Is YX Precious Metals Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is YX Precious Metals Bhd Efficiently Re-investing Its Profits?
YX Precious Metals Bhd’s three-year median payout ratio to shareholders is 21%, which is quite low. This implies that the company is retaining 79% 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.
While YX Precious Metals Bhd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
In total, it does look like YX Precious Metals Bhd has some positive aspects to its business. 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. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for YX Precious Metals Bhd visit our risks dashboard for free.
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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.