Most readers would already know that Power Root Berhad's (KLSE:PWROOT) stock increased by 8.3% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Power Root Berhad's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Power Root Berhad
How Is ROE Calculated?
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 Power Root Berhad is:
18% = RM50m ÷ RM269m (Based on the trailing twelve months to September 2022).
The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.18.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Power Root Berhad's Earnings Growth And 18% ROE
At first glance, Power Root Berhad seems to have a decent ROE. Even when compared to the industry average of 18% the company's ROE looks quite decent. This certainly adds some context to Power Root Berhad's moderate 8.5% net income growth seen over the past five years.
We then compared Power Root Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.3% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 PWROOT fairly valued? This infographic on the company's intrinsic value has everything you need to know.