With its stock down 21% over the past month, it is easy to disregard Lee Swee Kiat Group Berhad (KLSE:LEESK). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Lee Swee Kiat Group Berhad's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Lee Swee Kiat Group 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 Lee Swee Kiat Group Berhad is:
18% = RM14m ÷ RM77m (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.18 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Lee Swee Kiat Group Berhad's Earnings Growth And 18% ROE
To start with, Lee Swee Kiat Group Berhad's ROE looks acceptable. On comparing with the average industry ROE of 8.6% the company's ROE looks pretty remarkable. This probably laid the ground for Lee Swee Kiat Group Berhad's moderate 6.1% net income growth seen over the past five years.
We then compared Lee Swee Kiat Group Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.8% in the same 5-year period, which is a bit concerning.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Lee Swee Kiat Group Berhad is trading on a high P/E or a low P/E, relative to its industry.