It is hard to get excited after looking at L&P Global Berhad's (KLSE:L&PBHD) recent performance, when its stock has declined 6.7% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to L&P Global Berhad's ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for L&P Global Berhad
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for L&P Global Berhad is:
20% = RM19m ÷ RM96m (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.20.
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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
L&P Global Berhad's Earnings Growth And 20% ROE
To begin with, L&P Global Berhad seems to have a respectable ROE. Especially when compared to the industry average of 9.5% the company's ROE looks pretty impressive. This certainly adds some context to L&P Global Berhad's exceptional 29% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared L&P Global Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.
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 L&P Global Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.