Eco World Development Group Berhad's (KLSE:ECOWLD) stock is up by a considerable 46% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Eco World Development Group Berhad's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Eco World Development Group Berhad
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 Eco World Development Group Berhad is:
4.2% = RM202m ÷ RM4.8b (Based on the trailing twelve months to January 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 MYR0.04 in profit.
What Has ROE Got To Do With 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.
Eco World Development Group Berhad's Earnings Growth And 4.2% ROE
As you can see, Eco World Development Group Berhad's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 4.2%. Accordingly, Eco World Development Group Berhad's low net income growth of 4.2% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Eco World Development Group Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.7% in the same 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Eco World Development Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.