Most readers would already know that OKA Corporation Bhd's (KLSE:OKA) stock increased by 4.9% over the past month. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Specifically, we decided to study OKA Corporation Bhd's ROE in this article.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for OKA Corporation Bhd
How To 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 OKA Corporation Bhd is:
1.8% = RM3.5m ÷ RM190m (Based on the trailing twelve months to September 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.02.
What Has ROE Got To Do With 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. 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.
OKA Corporation Bhd's Earnings Growth And 1.8% ROE
It is hard to argue that OKA Corporation Bhd's ROE is much good in and of itself. Even compared to the average industry ROE of 5.9%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 2.2% seen by OKA Corporation Bhd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
However, when we compared OKA Corporation Bhd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 33% in the same period. This is quite worrisome.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 OKA Corporation Bhd is trading on a high P/E or a low P/E, relative to its industry.