Looking at SEG International Bhd's (KLSE:SEG) mostly flat share price movement over the past week, it is easy to think that there’s nothing interesting about the stock. Looking at its differing financials, we wonder if the market is focusing more on the company's negatives than on the positives resulting in the stock's drab performance. In this article, we decided to focus on SEG International Bhd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for SEG International Bhd

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 SEG International Bhd is:

9.5% = RM12m ÷ RM122m (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.09 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of SEG International Bhd's Earnings Growth And 9.5% ROE

When you first look at it, SEG International Bhd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 11%, so we won't completely dismiss the company. But SEG International Bhd saw a five year net income decline of 9.5% over the past five years. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

However, when we compared SEG International Bhd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 9.3% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SEG International Bhd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.