With its stock down 18% over the past week, it is easy to disregard Excel Force MSC Berhad (KLSE:EFORCE). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Excel Force MSC 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Excel Force MSC 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 Excel Force MSC Berhad is:
8.0% = RM8.6m ÷ RM107m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.08.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Excel Force MSC Berhad's Earnings Growth And 8.0% ROE
At first glance, Excel Force MSC Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.6%, so we won't completely dismiss the company. On the other hand, Excel Force MSC Berhad reported a moderate 14% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then performed a comparison between Excel Force MSC Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same 5-year period.