Scientex Berhad (KLSE:SCIENTX) has had a rough month with its share price down 9.8%. 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 Scientex 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.
See our latest analysis for Scientex Berhad
How To Calculate Return On Equity?
Return on equity 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 Scientex Berhad is:
14% = RM561m ÷ RM4.1b (Based on the trailing twelve months to October 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.14 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. 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.
A Side By Side comparison of Scientex Berhad's Earnings Growth And 14% ROE
To begin with, Scientex Berhad seems to have a respectable ROE. Especially when compared to the industry average of 6.4% the company's ROE looks pretty impressive. Probably as a result of this, Scientex Berhad was able to see a decent growth of 6.3% over the last five years.
As a next step, we compared Scientex 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 1.6%.
Earnings growth is an important metric to consider when valuing a stock. 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 SCIENTX fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Scientex Berhad Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Scientex Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.