Most readers would already be aware that OpenSys (M) Berhad's (KLSE:OPENSYS) stock increased significantly by 10% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on OpenSys (M) Berhad'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for OpenSys (M) Berhad
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 OpenSys (M) Berhad is:
14% = RM12m ÷ RM85m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.14 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
OpenSys (M) Berhad's Earnings Growth And 14% ROE
At first glance, OpenSys (M) Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.9%. Yet, OpenSys (M) Berhad has posted measly growth of 4.7% over the past five years. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that OpenSys (M) 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.
Earnings growth is a huge factor in stock valuation. 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 OpenSys (M) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.