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Fraser & Neave Holdings Bhd (KLSE:F&N) has had a rough three months with its share price down 13%. 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 Fraser & Neave Holdings Bhd's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Fraser & Neave Holdings Bhd
How Do You Calculate Return On Equity?
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 Fraser & Neave Holdings Bhd is:
12% = RM343m ÷ RM2.9b (Based on the trailing twelve months to June 2022).
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 MYR0.12.
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. 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.
Fraser & Neave Holdings Bhd's Earnings Growth And 12% ROE
To begin with, Fraser & Neave Holdings Bhd seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 15% does temper our expectations. Further, Fraser & Neave Holdings Bhd's five year net income growth of 2.7% is on the lower side. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. Therefore, the low earnings growth could be the result of other factors. Such as, the company pays out a huge portion of its earnings as dividends, or is facing competitive pressures.
We then performed a comparison between Fraser & Neave Holdings Bhd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.4% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for F&N? You can find out in our latest intrinsic value infographic research report.