With its stock down 13% over the past three months, it is easy to disregard P.I.E. Industrial Berhad (KLSE:PIE). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to P.I.E. Industrial Berhad's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for P.I.E. Industrial 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 P.I.E. Industrial Berhad is:

12% = RM75m ÷ RM633m (Based on the trailing twelve months to June 2024).

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 MYR0.12 in profit.

What Is The Relationship Between ROE And 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.

P.I.E. Industrial Berhad's Earnings Growth And 12% ROE

To start with, P.I.E. Industrial Berhad's ROE looks acceptable. On comparing with the average industry ROE of 7.3% the company's ROE looks pretty remarkable. Probably as a result of this, P.I.E. Industrial Berhad was able to see a decent growth of 16% over the last five years.

Next, on comparing P.I.E. Industrial 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 18% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if P.I.E. Industrial Berhad is trading on a high P/E or a low P/E, relative to its industry.