Opcom Holdings Berhad's (KLSE:OPCOM) stock up by 4.9% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Opcom Holdings 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Opcom Holdings Berhad
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Opcom Holdings Berhad is:
6.3% = RM16m ÷ RM256m (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.06 in profit.
What Has ROE Got To Do With 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.
Opcom Holdings Berhad's Earnings Growth And 6.3% ROE
At first glance, Opcom Holdings Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.8%, so we won't completely dismiss the company. On the other hand, Opcom Holdings Berhad reported a moderate 11% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Opcom Holdings Berhad's reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Opcom Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.