Batu Kawan Berhad's (KLSE:BKAWAN) stock is up by 1.6% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Batu Kawan Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Batu Kawan 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 Batu Kawan Berhad is:
4.8% = RM758m ÷ RM16b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.05 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. 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. 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.
Batu Kawan Berhad's Earnings Growth And 4.8% ROE
As you can see, Batu Kawan Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 6.4%, the company's ROE is quite dismal. Therefore, Batu Kawan Berhad's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing Batu Kawan Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 1.6% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Batu Kawan Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.