Kelington Group Berhad (KLSE:KGB) has had a rough three months with its share price down 6.4%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Kelington Group Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Kelington Group 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 Kelington Group Berhad is:
24% = RM58m ÷ RM242m (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.24 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
A Side By Side comparison of Kelington Group Berhad's Earnings Growth And 24% ROE
Firstly, we acknowledge that Kelington Group Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 4.4% the company's ROE is quite impressive. As a result, Kelington Group Berhad's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.
When you consider the fact that the industry earnings have shrunk at a rate of 5.3% in the same period, the company's net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Kelington Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.