With its stock down 32% over the past three months, it is easy to disregard GDB Holdings Berhad (KLSE:GDB). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study GDB Holdings Berhad'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.
See our latest analysis for GDB Holdings 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 GDB Holdings Berhad is:
16% = RM25m ÷ RM156m (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.16 in profit.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
GDB Holdings Berhad's Earnings Growth And 16% ROE
To start with, GDB Holdings Berhad's ROE looks acceptable. Especially when compared to the industry average of 5.1% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in GDB Holdings Berhad's meagre five year net income growth average of 2.2%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
When you consider the fact that the industry earnings have shrunk at a rate of 6.4% in the same period, the company's net income growth is pretty remarkable.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about GDB Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.