It is hard to get excited after looking at LFE Corporation Berhad's (KLSE:LFECORP) recent performance, when its stock has declined 21% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study LFE Corporation Berhad's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 LFE Corporation Berhad is:
24% = RM25m ÷ RM107m (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.24 in profit.
View our latest analysis for LFE Corporation Berhad
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. 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.
LFE Corporation Berhad's Earnings Growth And 24% ROE
Firstly, we acknowledge that LFE Corporation Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 8.5% the company's ROE is quite impressive. As a result, LFE Corporation Berhad's exceptional 56% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared LFE Corporation Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is LFE Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.