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Should the weakness in TMC Life Sciences Berhad (KLSE:TMCLIFE) shares be taken as a sign that the market will correct the share price given the good financials?

With shares down 6.3% over the past month, it’s easy to ignore TMC Life Sciences Berhad (KLSE:TMCLIFE). However, the company’s fundamentals look quite good, and its long-term financials are generally aligned with future market price movements. Today we will mainly focus on TMC Life Sciences Berhad’s ROE.

ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to its shareholders’ equity.

Check out our latest analysis for TMC Life Sciences Berhad

How is ROE calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) รท Shareholders’ Equity

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

6.5% = RM57mil RM877mil (based on trailing twelve months to December 2023).

The ‘return’ is the income the company has earned over the past year. This means that for every MYR1 of equity, the company generated MYR0.07 in profit.

What does ROE have to do with earnings growth?

So far we’ve learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we can then evaluate a company’s future ability to generate profits. All other things being equal, companies with a high return on equity and profit retention tend to have a higher growth rate than companies that don’t share these characteristics.

TMC Life Sciences Berhad earnings growth and 6.5% ROE

At first glance, TMC Life Sciences Berhad’s ROE doesn’t look promising. We then compared the company’s ROE with the broader industry and were disappointed to see that the ROE was lower than the industry average of 11%. Still, we can see that TMC Life Sciences Berhad has shown modest net profit growth of 20% over the past five years. We think that other factors may play a role here. For example, it is possible that the company’s management has made good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared TMC Life Sciences Berhad’s net income growth with the industry and found that the company has a similar growth rate compared to the industry average growth rate of 24% over the same period.

past profit growthpast profit growth

past profit growth

The basis for assigning value to a company is largely linked to profit growth. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing this, they will get an idea if the stock is headed to clear blue waters or if swampy waters await. If you’re wondering about TMC Life Sciences Berhad’s valuation, check out this gauge of its price-to-earnings ratio, compared to the industry.

Does TMC Life Sciences Berhad make effective use of retained earnings?

In the case of TMC Life Sciences Berhad, its respectable earnings growth can likely be explained by its low three-year average payout ratio of 15% (or an 85% retention ratio), which suggests that the company is investing most of its profits in growth . its business.

Moreover, TMC Life Sciences 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.

Resume

Overall, we believe that TMC Life Sciences Berhad certainly has some positive factors to consider. Despite the low returns, the company has achieved impressive profit growth as a result of heavy reinvestment in its business.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.