It is hard to get excited after looking at Far East Holdings Berhad's (KLSE:FAREAST) recent performance, when its stock has declined 3.5% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Far East Holdings Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Far East Holdings 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 Far East Holdings Berhad is:
14% = RM208m ÷ RM1.5b (Based on the trailing twelve months to September 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.
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.
Far East Holdings Berhad's Earnings Growth And 14% ROE
To start with, Far East Holdings Berhad's ROE looks acceptable. On comparing with the average industry ROE of 9.2% the company's ROE looks pretty remarkable. This probably laid the ground for Far East Holdings Berhad's moderate 13% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Far East Holdings Berhad's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.
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. What is FAREAST worth today? The intrinsic value infographic in our free research report helps visualize whether FAREAST is currently mispriced by the market.