Could The Market Be Wrong About Optimax Holdings Berhad (KLSE:OPTIMAX) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Optimax Holdings Berhad's (KLSE:OPTIMAX) recent performance, when its stock has declined 3.6% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Optimax Holdings Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Optimax Holdings Berhad

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Optimax Holdings Berhad is:

25% = RM16m ÷ RM62m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.25 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Optimax Holdings Berhad's Earnings Growth And 25% ROE

To begin with, Optimax Holdings Berhad has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. So, the substantial 30% net income growth seen by Optimax Holdings Berhad over the past five years isn't overly surprising.

As a next step, we compared Optimax Holdings Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 32% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One 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 prospects. So, you may want to check if Optimax Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Optimax Holdings Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 80% (implying that it keeps only 20% of profits) for Optimax Holdings Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While Optimax Holdings Berhad 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 87% of its profits over the next three years. Still, forecasts suggest that Optimax Holdings Berhad's future ROE will rise to 33% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we are quite pleased with Optimax Holdings Berhad's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.