Are Microlink Solutions Berhad's (KLSE:MICROLN) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at Microlink Solutions Berhad's (KLSE:MICROLN) recent performance, when its stock has declined 52% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Microlink Solutions Berhad's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Microlink Solutions Berhad

How Is ROE Calculated?

ROE 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 Microlink Solutions Berhad is:

2.1% = RM4.9m ÷ RM226m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.02.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Microlink Solutions Berhad's Earnings Growth And 2.1% ROE

It is hard to argue that Microlink Solutions Berhad's ROE is much good in and of itself. Even compared to the average industry ROE of 7.0%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Microlink Solutions Berhad grew its net income at a significant rate of 33% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Microlink Solutions Berhad's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Microlink Solutions Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Microlink Solutions Berhad Using Its Retained Earnings Effectively?

Microlink Solutions Berhad's ' three-year median payout ratio is on the lower side at 6.2% implying that it is retaining a higher percentage (94%) of its profits. So it looks like Microlink Solutions Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Microlink Solutions Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Microlink Solutions Berhad certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 Microlink Solutions Berhad 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.