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Reservoir Link Energy Bhd (KLSE:RL) stock has shown weakness lately, but the financial outlook looks decent: is the market wrong?

Reservoir Link Energy Bhd (KLSE:RL) had a tough three months with its share price down 14%. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In this article, we have decided to focus on the ROE of Reservoir Link Energy Bhd.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest review for Reservoir Link Energy Bhd

How is ROE calculated?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Reservoir Link Energy Bhd is:

2.2% = RM1.6m ÷ RM75m (Based on trailing twelve months to June 2022).

The “return” is the annual profit. This means that for every MYR1 of equity, the company has generated MYR 0.02 of profit.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Earnings growth and ROE of 2.2% at Reservoir Link Energy Bhd

As you can see, the ROE of Reservoir Link Energy Bhd seems quite low. Not only that, even compared to the industry average of 8.0%, the company’s ROE is quite unremarkable. However, the moderate 18% net income growth seen by Reservoir Link Energy Bhd over the past five years is definitely positive. Therefore, the earnings growth could likely have been caused by other variables. For example, the business has a low payout ratio or is efficiently managed.

We then performed a comparison of Reservoir Link Energy Bhd’s net income growth with the industry, which revealed that the company’s growth is similar to the industry average growth of 18% over the same period.

past earnings-growth

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about the valuation of Reservoir Link Energy Bhd, check out this indicator of its price/earnings ratio, relative to its sector.

Does Reservoir Link Energy Bhd Use Retained Earnings Effectively?

Reservoir Link Energy Bhd has a low three-year median payout ratio of 22%, meaning the company keeps the remaining 78% of its profits. This suggests that the management reinvests most of the profits to grow the business.

Although Reservoir Link Energy Bhd has seen earnings growth, it has only recently started paying a dividend. Chances are the company has decided to impress new and existing shareholders with a dividend. Our latest analyst data shows the company’s future payout ratio is expected to drop to 5.9% over the next three years. Thus, the expected decline in the payout ratio explains the expected increase in the company’s ROE to 11%, over the same period.

Summary

Overall, we think Reservoir Link Energy Bhd certainly has positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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