It is hard to get excited after looking at Lii Hen Industries Bhd's (KLSE:LIIHEN) recent performance, when its stock has declined 5.7% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Lii Hen Industries Bhd's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Lii Hen Industries Bhd
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Lii Hen Industries Bhd is:
11% = RM60m ÷ RM546m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.11 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Lii Hen Industries Bhd's Earnings Growth And 11% ROE
At first glance, Lii Hen Industries Bhd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 8.5%, is definitely interesting. However, Lii Hen Industries Bhd's five year net income decline rate was 4.0%. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to shrink.
However, when we compared Lii Hen Industries Bhd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.5% in the same period. This is quite worrisome.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Lii Hen Industries Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.