Most readers would already be aware that Perusahaan Sadur Timah Malaysia (Perstima) Berhad's (KLSE:PERSTIM) stock increased significantly by 6.3% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Perusahaan Sadur Timah Malaysia (Perstima) Berhad's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Perusahaan Sadur Timah Malaysia (Perstima) Berhad

How To Calculate Return On Equity?

ROE 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad is:

12% = RM65m ÷ RM538m (Based on the trailing twelve months to September 2022).

The 'return' is the profit 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?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Perusahaan Sadur Timah Malaysia (Perstima) Berhad's Earnings Growth And 12% ROE

To start with, Perusahaan Sadur Timah Malaysia (Perstima) Berhad's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. This probably goes some way in explaining Perusahaan Sadur Timah Malaysia (Perstima) Berhad's moderate 14% growth over the past five years amongst other factors.

We then compared Perusahaan Sadur Timah Malaysia (Perstima) Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 30% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.