Privasia Technology Berhad (KLSE:PRIVA) has had a rough month with its share price down 4.8%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Privasia Technology Berhad's ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Privasia Technology Berhad
How Do You Calculate Return On Equity?
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 Privasia Technology Berhad is:
1.7% = RM1.0m ÷ RM60m (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.02.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 Privasia Technology Berhad's Earnings Growth And 1.7% ROE
It is quite clear that Privasia Technology Berhad's ROE is rather low. Even when compared to the industry average of 16%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Privasia Technology Berhad grew its net income at a significant rate of 20% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Privasia Technology Berhad's growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Privasia Technology Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.