With its stock down 14% over the past three months, it is easy to disregard Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Kim Hin Joo (Malaysia) Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Kim Hin Joo (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 Kim Hin Joo (Malaysia) Berhad is:
2.3% = RM1.9m ÷ RM80m (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.02 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Kim Hin Joo (Malaysia) Berhad's Earnings Growth And 2.3% ROE
It is quite clear that Kim Hin Joo (Malaysia) Berhad's ROE is rather low. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. For this reason, Kim Hin Joo (Malaysia) Berhad's five year net income decline of 26% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
That being said, we compared Kim Hin Joo (Malaysia) Berhad's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Kim Hin Joo (Malaysia) Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.