UMS Holdings Limited (SGX:558) Stock's Been Sliding But ...

UMS Holdings (SGX:558) has had a rough week with its share price down 5.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to UMS Holdings' ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for UMS Holdings

How Do You Calculate Return On Equity?

Return on equity 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 UMS Holdings is:

26% = S$99m ÷ S$387m (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.26 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

UMS Holdings' Earnings Growth And 26% ROE

First thing first, we like that UMS Holdings has an impressive ROE. Further, even comparing with the industry average if 24%, the company's ROE is quite respectable. Therefore, it looks like the high ROE is what probably supported UMS Holdings' modest 16% growth over the past five years.

Next, on comparing with the industry net income growth, we found that UMS Holdings' reported growth was lower than the industry growth of 28% in the same period, which is not something we like to see.

past-earnings-growth

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. If you're wondering about UMS Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is UMS Holdings Using Its Retained Earnings Effectively?

While UMS Holdings has a three-year median payout ratio of 51% (which means it retains 49% 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.

Besides, UMS Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 42%. However, UMS Holdings' future ROE is expected to decline to 20% despite there being not much change anticipated in the company's payout ratio.

Conclusion

On the whole, we do feel that UMS Holdings has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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