It is hard to get excited after looking at Steel Hawk Berhad's (KLSE:HAWK) recent performance, when its stock has declined 6.2% over the past three months. 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. In this article, we decided to focus on Steel Hawk Berhad's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Steel Hawk 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 Steel Hawk Berhad is:
27% = RM13m ÷ RM46m (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.27 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Steel Hawk Berhad's Earnings Growth And 27% ROE
First thing first, we like that Steel Hawk Berhad has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. So, the substantial 41% net income growth seen by Steel Hawk Berhad over the past five years isn't overly surprising.
We then performed a comparison between Steel Hawk Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 37% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Steel Hawk Berhad is trading on a high P/E or a low P/E, relative to its industry.