Magni-Tech Industries Berhad (KLSE:MAGNI) has had a rough three months with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Magni-Tech Industries Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Magni-Tech Industries 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 Magni-Tech Industries Berhad is:
12% = RM95m ÷ RM775m (Based on the trailing twelve months to July 2022).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.12 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. 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.
Magni-Tech Industries Berhad's Earnings Growth And 12% ROE
At first glance, Magni-Tech Industries Berhad seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 11%. However, we are curious as to how Magni-Tech Industries Berhad's decent returns still resulted in flat growth for Magni-Tech Industries Berhad in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Magni-Tech Industries Berhad's net income growth with the industry and found that the industry which has shrunk at a rate of 1.8% in the same period, which makes the company's growth somewhat better.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Magni-Tech Industries Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.