FCW Holdings Berhad (KLSE:FCW) has had a rough week with its share price down 2.9%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study FCW Holdings Berhad'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for FCW Holdings Berhad
How Is ROE Calculated?
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 FCW Holdings Berhad is:
9.1% = RM23m ÷ RM253m (Based on the trailing twelve months to March 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.09.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
FCW Holdings Berhad's Earnings Growth And 9.1% ROE
At first glance, FCW Holdings Berhad's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.9%. Even so, FCW Holdings Berhad has shown a fairly decent growth in its net income which grew at a rate of 5.4%. 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. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that FCW Holdings Berhad's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is FCW Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.