It is hard to get excited after looking at Orgabio Holdings Berhad's (KLSE:ORGABIO) recent performance, when its stock has declined 4.8% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Orgabio Holdings Berhad's ROE in this article.
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 Orgabio Holdings Berhad
How Is ROE Calculated?
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 Orgabio Holdings Berhad is:
24% = RM5.8m ÷ RM24m (Based on the trailing twelve months to June 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.24 in profit.
What Is The Relationship Between ROE And 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.
Orgabio Holdings Berhad's Earnings Growth And 24% ROE
First thing first, we like that Orgabio Holdings Berhad has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Probably as a result of this, Orgabio Holdings Berhad was able to see a decent net income growth of 9.3% over the last five years.
Next, on comparing Orgabio Holdings Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Orgabio Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.