Most readers would already be aware that MyTech Group Berhad's (KLSE:MYTECH) stock increased significantly by 31% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to MyTech Group Berhad's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for MyTech Group Berhad
How Do You 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 MyTech Group Berhad is:
5.3% = RM2.2m ÷ RM41m (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.05 in profit.
Why Is ROE Important For 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 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.
MyTech Group Berhad's Earnings Growth And 5.3% ROE
As you can see, MyTech Group Berhad's ROE looks pretty weak. Not just that, even compared to the industry average of 7.9%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by MyTech Group Berhad over the past five years could probably be the result of it having a lower ROE.
We then compared MyTech Group Berhad's net income growth with the industry and found that the average industry growth rate was 8.7% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about MyTech Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.