Uchi Technologies Berhad's (KLSE:UCHITEC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 6.6% over the past month, it is easy to disregard Uchi Technologies Berhad (KLSE:UCHITEC). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Uchi Technologies Berhad's ROE.

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.

View our latest analysis for Uchi Technologies Berhad

How To Calculate Return On Equity?

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 Uchi Technologies Berhad is:

67% = RM135m ÷ RM203m (Based on the trailing twelve months to December 2023).

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 MYR0.67 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Uchi Technologies Berhad's Earnings Growth And 67% ROE

Firstly, we acknowledge that Uchi Technologies Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.9% which is quite remarkable. This likely paved the way for the modest 15% net income growth seen by Uchi Technologies Berhad over the past five years.

As a next step, we compared Uchi Technologies Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% in the same 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). This then helps them determine if the stock is placed for a bright or bleak future. Is UCHITEC fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Uchi Technologies Berhad Efficiently Re-investing Its Profits?

While Uchi Technologies Berhad has a three-year median payout ratio of 92% (which means it retains 7.7% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Uchi Technologies 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 86%. Accordingly, forecasts suggest that Uchi Technologies Berhad's future ROE will be 61% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Uchi Technologies Berhad has some positive attributes. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.