Kim Teck Cheong Consolidated Berhad (KLSE:KTC) has had a great run on the share market with its stock up by a significant 84% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Kim Teck Cheong Consolidated Berhad's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Kim Teck Cheong Consolidated 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 Kim Teck Cheong Consolidated Berhad is:
14% = RM22m ÷ RM161m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.14 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. 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 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.
Kim Teck Cheong Consolidated Berhad's Earnings Growth And 14% ROE
At first glance, Kim Teck Cheong Consolidated Berhad seems to have a decent ROE. On comparing with the average industry ROE of 9.4% the company's ROE looks pretty remarkable. This certainly adds some context to Kim Teck Cheong Consolidated Berhad's exceptional 47% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Kim Teck Cheong Consolidated Berhad's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Kim Teck Cheong Consolidated Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.