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With its stock down 2.0% over the past three months, it is easy to disregard Heineken Malaysia Berhad (KLSE:HEIM). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Heineken Malaysia Berhad's ROE.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Heineken Malaysia Berhad
How Is ROE Calculated?
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 Heineken Malaysia Berhad is:
68% = RM409m ÷ RM598m (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.68 in profit.
What Is The Relationship Between ROE And 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 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.
Heineken Malaysia Berhad's Earnings Growth And 68% ROE
First thing first, we like that Heineken Malaysia Berhad has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 21% which is quite remarkable. This probably laid the groundwork for Heineken Malaysia Berhad's moderate 5.2% net income growth seen over the past five years.
As a next step, we compared Heineken Malaysia Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.7% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Heineken Malaysia Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.