It is hard to get excited after looking at Tex Cycle Technology (M) Berhad's (KLSE:TEXCYCL) recent performance, when its stock has declined 2.3% over the past week. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Tex Cycle Technology (M) Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Tex Cycle Technology (M) Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tex Cycle Technology (M) Berhad is:
5.5% = RM6.6m ÷ RM119m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.06.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Tex Cycle Technology (M) Berhad's Earnings Growth And 5.5% ROE
As you can see, Tex Cycle Technology (M) Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 7.2%, the company's ROE is quite dismal. For this reason, Tex Cycle Technology (M) Berhad's five year net income decline of 29% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
However, when we compared Tex Cycle Technology (M) Berhad's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.7% in the same period. This is quite worrisome.