N2N Connect Berhad's (KLSE:N2N) stock is up by a considerable 20% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to N2N Connect Berhad's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for N2N Connect Berhad

How Do You 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 N2N Connect Berhad is:

6.3% = RM18m ÷ RM279m (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 in profit.

Why Is ROE Important For 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. 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.

N2N Connect Berhad's Earnings Growth And 6.3% ROE

On the face of it, N2N Connect Berhad's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 10% either. Accordingly, N2N Connect Berhad's low net income growth of 2.8% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared N2N Connect 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 4.6% in the same period.

Earnings growth is a huge factor in stock valuation. 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. What is N2N worth today? The intrinsic value infographic in our free research report helps visualize whether N2N is currently mispriced by the market.