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TMC Life Sciences Berhad (KLSE:TMCLIFE) financials are too murky to relate to current stock price dynamics: What does the stock hold?

TMC Life Sciences Berhad (KLSE:TMCLIFE) stock is up 11% over the past week. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on the ROE of TMC Life Sciences Berhad.

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.

Check out our latest analysis for TMC Life Sciences Berhad

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for TMC Life Sciences Berhad is:

2.3% = RM18 million ÷ RM797 million (based on trailing twelve months to December 2021).

“Yield” refers to a company’s earnings over the past year. This means that for every MYR1 of equity, the company has generated MYR 0.02 of profit.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Earnings growth and ROE of 2.3% from TMC Life Sciences Berhad

It is difficult to say that the ROE of TMC Life Sciences Berhad is very good on its own. Not only that, even compared to the industry average of 11%, the company’s ROE is quite unremarkable. For this reason, TMC Life Sciences Berhad’s 9.0% drop in five-year net profit is not surprising given its lower ROE. We believe there could be other factors at play here as well. For example, the company has misallocated capital or the company has a very high payout ratio.

Moreover, even relative to the industry, which has cut earnings at a rate of 3.8% over the same period, we found that TMC Life Sciences Berhad’s performance is quite disappointing, as it suggests that the company cut profits at a faster rate than the industry.

KLSE:TMCLIFE Past Earnings Growth February 12, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if TMC Life Sciences Berhad is trading on a high P/E or a low P/E, relative to its industry.

Does TMC Life Sciences Berhad use its profits effectively?

When we piece together TMC Life Sciences Berhad’s low three-year median payout ratio of 18% (where it retains 82% of its earnings), calculated for the last three-year period, we are surprised at the lack of growth. The low payout should mean that the company keeps most of its profits and therefore should see some growth. So there could be other explanations for this. For example, the company’s business may deteriorate.

Additionally, TMC Life Sciences Berhad has paid dividends over an eight-year period, suggesting that maintaining the payment of dividends is preferred by management even if earnings are down.

Summary

Overall, we believe that the performance displayed by TMC Life Sciences Berhad is open to many interpretations. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. You can see the 1 risk we have identified for TMC Life Sciences Berhad by visiting our risk dashboard for free on our platform here.

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.