Homeritz Corporation Berhad's (KLSE:HOMERIZ) stock is up by 3.6% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Homeritz Corporation Berhad's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Homeritz Corporation 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 Homeritz Corporation Berhad is:
11% = RM32m ÷ RM292m (Based on the trailing twelve months to February 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.11 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of Homeritz Corporation Berhad's Earnings Growth And 11% ROE
At first glance, Homeritz Corporation Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 8.6%, is definitely interesting. This probably goes some way in explaining Homeritz Corporation Berhad's moderate 8.5% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Homeritz Corporation Berhad's growth is quite high when compared to the industry average growth of 5.8% in the same period, which is great to see.