ACO Group Berhad (KLSE:ACO) has had a great run on the share market with its stock up by a significant 10.0% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study ACO Group Berhad's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for ACO Group Berhad

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for ACO Group Berhad is:

9.3% = RM8.2m ÷ RM88m (Based on the trailing twelve months to August 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.09 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. 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.

ACO Group Berhad's Earnings Growth And 9.3% ROE

At first glance, ACO Group Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.0%, so we won't completely dismiss the company. We can see that ACO Group Berhad has grown at a five year net income growth average rate of 4.4%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that ACO Group Berhad's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

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. Is ACO Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.