With its stock down 5.5% over the past three months, it is easy to disregard KPJ Healthcare Berhad (KLSE:KPJ). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on KPJ Healthcare 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for KPJ Healthcare Berhad
How Do You Calculate Return On Equity?
Return on equity 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 KPJ Healthcare Berhad is:
13% = RM346m ÷ RM2.6b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.13 in profit.
What Has ROE Got To Do With 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 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 KPJ Healthcare Berhad's Earnings Growth And 13% ROE
To start with, KPJ Healthcare Berhad's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to KPJ Healthcare Berhad's moderate 8.6% net income growth seen over the past five years.
As a next step, we compared KPJ Healthcare Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 24% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is KPJ worth today? The intrinsic value infographic in our free research report helps visualize whether KPJ is currently mispriced by the market.